What is a Guarantee Company?
03 December 2020
When setting up a new company it can be overwhelming to determine which type of company best suits your needs. In addition to companies limited by shares (LTD) and limited liability partnerships (LLP), it may also be limited by guarantee. The following guide outlines all the key features of a guarantee company.
Defining a Guarantee Company
A company limited by guarantee, also known as a ‘not for profit’ or ‘charitable company’, is one in which shareholders do not remove the profit from the company. Instead, all profit made by the company is re-used for the good of the business.
A company limited by guarantee is mainly used by charities, social enterprises, and non-profit organisations.
A company without shares
Whilst guarantee companies do not have any shares or shareholders, it is under the ownership of guarantors who pay an agreed amount towards company debts.
This guarantee lawfully binds the owners in place of shares. Alternatively, company earnings are retained by the company to realise their charitable or non-profit objectives.
Normally, a guarantee company does not distribute profits to guarantors. These are instead re-invested to aid the company in achieving its objectives. Any distribution of profits within the company will force the forfeit of its ‘charitable status’.
Much like shareholders in a company limited by shares, the guarantors are protected by limited liability. In the event of bankruptcy, their financial liability is limited to what they have agreed to pay. Guarantors have no legal accountability for the debts beyond their limited liability.
Ownership and Control
A guarantee company is controlled by the director and at least one director must be appointed to run the regular business operations and financial investments. This director may also be a guarantor in the company.
The company is owned by the guarantors and only one guarantor is required. This guarantor may be a person or a corporate entity. Each guarantor signs a guarantee statement at the formation of the company, agreeing to a specific amount payable as a guarantee should the company fail. This guarantee is usually £1 per member.
Guarantee company vs LLP
Whether you set up a guarantee company or LLP will depend on your company’s objectives.
A guarantee company is suited to anyone seeking to operate a social enterprise or non-profit organisation whilst safeguarding their own liability.
An LLP is an incorporated structure more suited to groups seeking to operate a commercial partnership in order to reduce their individual financial liability. LLPs are most often set up by accountants and solicitors.
The benefits of a guarantee company
A company limited by guarantee possesses many benefits. Firstly, it is a separate legal entity from its owners, and therefore is responsible for its own debts.
Secondly, the guarantors have protection over their own personal finances and are responsible only for paying company debts up to the amount guaranteed.
Finally, the formation of a Limited company is beneficial to boost company branding. This makes the company appear more credible and builds trust among clients and investors.
Find out more
For more information on guarantee companies or help on setting up your own company, contact us at our website or give us a call on 028 9055 9955.
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