This essay British and Irish company law has a total of 1962 words and 9 pages.
In British and Irish company law, a private company limited by guarantee is an alternative type of corporation used primarily for non-profit organisations that require legal personality. A company limited by guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a nominal amount (typically very small) in the event of the winding up of the company. It is often believed that such a company cannot distribute its profits to its members but (depending on the provisions of the articles) this is not actually true. Converting a limited company to a Community Interest Company (CIC) removes this doubt entirely, as CICs feature an asset lock which prevents the extraction of profits. However, a company limited by guarantee that distributes its profits to members (nor CICs) would not be eligible for charitable status.
A private company limited by shares, usually called a private limited company (Ltd.) (though this can theoretically also refer to a private company limited by guarantee), is a type of company incorporated under the laws of England and Wales, Scotland, that of certain Commonwealth countries and the Republic of Ireland. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company (plc).
"Limited by shares" means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.
Companies limited by guarantee are widely used for charities, community projects, clubs, societies and other similar bodies. Most guarantee companies are not-for-profit companies, that is, they do not distribute their profits to their members but either retain them within the company or use them for some other purpose. Most such companies need their articles to be drafted for that particular organisation, and this is the main specialised work to be undertaken.
Community Companies CIC at registering such companies and their website gives much more detailed information.
Why use a guarantee company?
The main reason for a charity, community project, etc., to be a company limited by guarantee is to protect the people running the company from personal liability for the company's debts, just as a business may be set up as a company limited by shares for the same reason. Sometimes funding bodies, such as local authorities, insist on an organisation being registered as a company limited by guarantee.
If a charity, community project, club, etc. is not registered as a limited company, then the people running it (typically the management committee, etc.) can be made personally liable for its unpaid debts. This can be a real risk. Some charities, community groups, sports clubs, etc. can be substantial enterprises, with liabilities that cannot easily be turned off. They may have leasehold premises, employ people, have equipment on finance contracts, etc. If the income does not meet these outgoings, the charity, etc. may become insolvent, and the people running it (though not usually the members at large who are not on the committee) can be made personally liable for the shortfall. This can happen because of unforeseen and unfortunate circumstances, such as the sudden withdrawal of financial support from a body such as the local authority.
With a company, on the other hand, the company itself is a separate legal entity and it, not the people who own or run it, is liable for its debts. In a company limited by shares, the shareholders' liability is limited to the amount the shareholder has agreed to pay for his or her shares. In a company limited by guarantee, the liability is limited to the amount of the guarantee set out in the company's articles, which is typically just £1.
In both a company limited by shares and one limited by guarantee, the people running the company (the directors) will only incur any personal liability for the company's debts if they have been guilty of some wrongdoing, such as wrongful or fraudulent trading.
What is different
Topics Related to British and Irish company law
Legal entities, Types of business entity, Social economy, Business law, Corporate law, Private company limited by guarantee, Company, Companies law, Guarantee, Surety, Corporation, Nonprofit organization
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