Everything You Need To Know About Company Limited By Guarantee

Section 2(21) of Companies Act 2013 defines companies limited by guarantee as ‘’a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.’’

What is the meaning of company limited by guarantee?

Company limited by guarantee is also termed as Guarantee Company. In a simpler term, it’s a company without any shareholders but it is owned by members called guarantors who agrees to pay a nominal amount in the event of company’s being wound up. It’s a specific form used for non-profit organisation. Under this form, profits earned by the company are re invested again in the company to use it for different purposes. Hence, it’s a legally preferred structure for non-profit companies, clubs, charitable trusts and other similar set ups. A company limited by guarantee has a separate legal identity. It can carry out activities in the name of the company such as employing human resources, borrowing credit, buy and sell of property and defending a lawsuit etc. Memorandum of association is specifically drafted for such type of companies.

Key points to company limited by guarantee

1. Members will have protection for being held liable in their personal capacity for the amount borrowed for business in the name of the company.
2. Members of the company are only liable to pay only the guaranteed amount as mentioned in memorandum of association of the company.
3. Members are liable to pay only at the time of winding up of company

What are the types of Guarantee Company

Guarantee companies or companies limited by guarantee are categorised in two types.

1. Company limited by guarantee having share capital

Company will be set in motion with some initial capital or working funds from its members as initial working capital is not available through grants, subscriptions, fees, endowments or any other sources. But later, once the operation is started, normal working funds can be received from the services rendered in the form of fees, charges and subscriptions. Voting power in guarantee company having share capital is determined by the shareholding.

2. Company limited by guarantee not having share capital

Such type of guarantee companies do not obtain initial capital or working funds from its members. Instead, the company raise the working funds through various other sources like endowments, grants, subscriptions and fees etc. For example, non-profit companies or charitable institutes started by public donations or government grants. Voting power in guarantee company not having share capital is determined by the guarantee.

Features and Benefits of Company Limited by Guarantee

1. A company limited by guarantee is a distinct legal entity from its owner/guarantor. Company itself is responsible for its debts.
2. Guarantors are not personally held responsible for any of company’s debts. Hence, their personal assets are protected. They are only responsible to pay agreed amount as per their guarantee only in the event of company’s insolvency.
3. Any person or corporate body can be a guarantor. It requires a single director and a single guarantor to get established. A same person can assume both the position that makes it easy for anyone to start a company. However, multiple directors and guarantors are allowed too!
4. Company limited by guarantee is normally set up for non-profit purposes. Any profit generated by the company are reinvested and used for promoting its non-profit activities.
5. Company limited by guarantee must include the suffix ‘’limited’’ in its name. This word gives a kind of trust to clients and investors.

What are the provisions to Company Limited by Guarantee

1. As per Section 37 of Companies Act, 2013, a company limited by guarantee and not having a share capital, and registered on or after the first day of April, 1914, every provision in the memorandum or articles or in any resolution of the company purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.
2. For the purpose of the provisions of this Act relating to the memorandum of a company limited by guarantee and of this section, every provision in the memorandum or articles, or in any resolution, of any company limited by guarantee and registered on or after the first day of April, 1914, purporting to divide the undertaking of the company into shares or interests, shall be treated as a provision for a share capital, not withstanding that the nominal amount or number of the shares or interests is not specified thereby.

Memorandum of Association

As per Section 4 (6) of the Companies Act, 2013, MOA should be in the form specified in Table B for companies limited by guarantee not having share capital and in Table C for companies limited by guarantee having share capital.

Articles of Association

As per Section 2 (5) of the Companies Act, 2013, article of company should be in the form specified in Table G for companies limited by guarantee having share capital and in Table H for companies limited by guarantee not having share capital.

Conclusion

To summarize, guarantee companies are commonly used for charities, clubs, sports associations, membership organizations, NGOs and other social enterprises. They are basically formed to render services to the public with no profit making intention.

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