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Spondoo Accounting

Companies Incorporated by Guarantee vs Share Capital

May 27, 2021

Differences between companies limited by shares and limited by guarantee

Private limited companies in the UK are either ‘limited by shares’ or ‘limited by guarantee. In this article, we will explain the difference between the two structures. We will also assess when to incorporate a limited by shares or guarantee company. 

Limited by shares companies 

You should consider this business structure if you intend to run a commercial business, where you take some or all the profit as personal income or dividends. 

Limited by shares companies are businesses that make a profit and: 

  • You can keep any profits it makes after paying tax. These profits are issued to members in the form of dividends. 
  • Has shares and shareholders. Shareholders have a right to make decisions on the business and receive dividends, as per their share agreements. 
  • Managed by one or more directors.  You can be a shareholder and director of your own company at the same time. 
  • Legally separate from the people who run it. In that case, the company exists as a distinct legal ‘entity that is separate from its shareholders and directors. 
  • Separates company finances from your personal ones. If the business becomes insolvent, the personal liability of shareholders is limited to the nominal value of their shares. The company itself is responsible for all debts and liabilities beyond this share capital. 

It is the most popular company structure for running a commercial business of all sizes, including startups. 

Why choose a limited by shares company? 

A limited by shares company is suitable for you if you are looking to:  

  • Enjoy limited liability for business debts and avoid being personally liable for the company debts.  
  • Create a professional, corporate image that attracts other limited companies to work together. Albeit you still need to consider your responsilbities as a director. 
  • Improve your chances of getting business finance and grants. 
  • Make use of the tax-efficient remuneration options and favourable tax-planning opportunities. 
  • Protect your business name and prevent other businesses from using it. 
  • Restrict your personal liability for business debts to a fixed sum (£1 per share taken). 
  • Run a profit-fuelled business by yourself or with others. 
  • Pull capital investment in exchange for shares in the business. 
  • Start any size and type of commercial business, including those which are ordinarily set up by sole traders 

Limited by guarantee companies 

A Limited by guarantee company is set up by guarantors who agree to pay a fixed amount of money (a ‘guarantee’) toward debts if the business becomes insolvent.  It is a ‘not for profit’ business that: 

  • Is legally separate from the people who run it. The company is responsible for its debts as it is a separate legal entity from its guarantor. 
  • Has separate finances from your personal ones. Members’ assets are protected since they are not personally liable for any of the company’s debts. Guarantors are only supposed to pay the agreed amount as per their guarantee only in the event of the company’s insolvency. 
  • Has guarantors and a ‘guaranteed amount.’ The financial guarantee is the limit of a guarantor’s personal liability to the company. 
  • Invests profits it makes back into the company- the guarantors don’t keep profits for themselves. 
  • Appoint at least one director to run the business. In most cases, a director is also a guarantor. 

Why choose a limited by guarantee company? 

A guarantee company is right for you if you want to: 

  • Establish a charity or a not-for-profit organisation by yourself or with others. 
  • Generate income for non-profit or charitable purposes instead of personal gain. 
  • Reduce your personal liability for business debts to a fixed sum (£1 per guarantee). 
  • Build up the image of your charity or organisation. Enhanced reporting and disclosure requirements make an incorporated business look more trustworthy, legitimate, and appealing to potential members, investors, donors, and supporters. 
  • Grow your organisation’s chances of receiving finance and grants. 
  • Prevent another company from using the name of your organisation or charity. 

Differences between limited companies – shares vs guarantee

Even though both companies provide limited liability to the owners of the business, they have these differences: 

Limited by shares 

Limited by guarantee 

  • Owned by one or more shareholders and managed by one or more directors. 
  • Controlled by one or more guarantors and managed by one or more directors. 
  • To become a shareholder, you must take at least one share of the company. 
  • To become a guarantor, you must guarantee a fixed sum of money to the company. It is the extent of a guarantor’s personal liability to the business, and it must be paid if the company becomes insolvent. 
  • Most popular company structure. Ideal for running a commercial business. 
  • Generates income for purely non-profit or charitable purposes instead of personal gain 
  • Profits are distributed to shareholders as personal remuneration. 
  • All the profits are reinvested in the company. However, members can distribute profits among themselves when the charitable status of the company becomes invalid. 

 

Can I change a limited by shares company to a limited by guarantee company? 

No, you cannot change the limited liability of an existing company from ‘guarantee’ to ‘shares’. However, you will have to incorporate an entirely new company if you wish to change your company’s structure. It is worth bearing in mind that you will still be required to meet all filing and reporting obligations for your existing company until it is dissolved.  

Need help with limited company formations and registration? 

The registration process for both company types is the same. Please read our step-by-step guide on how to set up a limited company, or talk to a specialist company formation accountants. 

 

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Information provided on the site is merely guidance that may change in line with UK law and regulations. Users must not consider this to be financial advice or their sole resource when making any financial decision. Spondoo is a trading name for Accounting SQL Limited, authorised & license accounting firm under the Institute of Financial Accountants.

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