What is a Guarantee Company?
A guarantee company (often called a “company limited by guarantee”) is a corporate form used mainly by non-profit and membership organisations to obtain corporate status while limiting members’ personal liability. Instead of holding shares, members agree to contribute a pre‑set nominal amount (the “guarantee”) if the company is wound up and cannot meet its debts. Because it has no shareholders entitled to dividends, a guarantee company is typically used for charities, clubs, trade associations, NGOs, social enterprises, and property-holding entities.
Key takeaways
– Structure: Members, not shareholders; assets are not divided into shares.
– Liability: Members’ liability is limited to the small guaranteed amount set in the company’s constitution (often £1 but can be larger).
– Purpose: Common for non-profits, membership organisations, co‑ops and entities that need corporate status without profit distribution.
– Governance: Can appoint directors who may be paid; decisions and limits are set out in the company’s articles/constitution.
– Jurisdictions: Widely used in the UK and other common-law countries (examples include Cricket Australia).
(Source: Investopedia — https://www.investopedia.com/terms/g/guarantee-company.asp)
How a guarantee company works
– Membership and guarantees: Each member signs up under the company’s articles and agrees to pay the specified guarantee only if the company is dissolved and creditors remain unpaid.
– No share capital: There are no shares or shareholders; surplus funds are retained for the company’s stated purpose (e.g., running a museum, funding community services).
– Directors and management: The company appoints directors to run operations; directors’ powers, remuneration and duties are set in the constitution and by applicable corporate law.
– Limited liability: The guarantee limits members’ exposure. However, directors may still have personal liability for wrongful or fraudulent trading, or breaches of statutory duties.
– Dissolution: If the company is wound up with outstanding debts, members are liable only up to their guaranteed amount as recorded in the articles.
When organisations typically choose a guarantee company
– Charities and non‑profits seeking corporate legal personality.
– Membership organisations (clubs, students’ unions, sporting associations).
– Social enterprises and NGOs that reinvest surplus into their purpose.
– Property management bodies set up to hold land interests divided into units.
– Situations where governance by members is important, but distribution of profits to members is not desired.
Advantages
– Clear legal personality for contracts, property ownership and litigation.
– Members are protected by limited liability (only the nominal guarantee is at risk).
– Aligns with non‑profit objectives since there are no dividend-bearing shareholders.
– Flexible constitution — guarantee amount and governance rules can be tailored.
Disadvantages and risks
– Members may still be required to pay the guarantee on dissolution.
– Directors and officers can be personally liable for misconduct or statutory breaches.
– Ongoing compliance (reports, accounts, governance) is required by local company law and regulatory bodies.
– Not suitable for organisations that intend to distribute profits to owners/investors.
Example: Cricket Australia
Cricket Australia is incorporated as “Cricket Australia (Company Limited by Guarantee)”. It comprises six member state associations and a board of directors. Under its constitution each member’s liability is limited to A$1,000. Cricket Australia collects revenues (gate, signage) and redistributes funds to the states under a minimum guarantee model that stabilises state finances against volatile match revenue.
Practical steps to form and operate a guarantee company (general checklist)
Note: procedures and names of registries differ by jurisdiction (e.g., Companies House in the UK; ASIC in Australia). Always confirm local requirements.
Before incorporation
1. Clarify purpose and fit: Confirm a guarantee company suits your goals (non‑profit, membership control, no profit distribution).
2. Draft a constitution/articles: Define objects/purposes, membership rules, guarantee amount, board structure, voting rights, and dissolution rules.
3. Choose members and directors: Identify initial members and at least one director (minimum numbers vary by jurisdiction).
Incorporation steps
4. Reserve and check company name: Confirm compliance with naming rules and whether terms like “Limited” are required or exempt.
5. Prepare incorporation documents: Articles/constitution, statement of guarantee, directors’ consents, registered office and prescribed forms.
6. File with company registry: Submit formation documents and pay fees to the appropriate authority (e.g., Companies House, ASIC). Receive certificate of incorporation.
Post‑incorporation setup
7. Establish governance: Hold an inaugural meeting, adopt the constitution, appoint officers, set signatories and board committees.
8. Financial setup: Open a bank account in the company’s name; set up accounting and reporting systems suitable for non‑profit governance.
9. Register for taxes and regulatory regimes: Register with tax authorities (e.g., HMRC, ATO), and with charity regulators if applicable. Apply for tax‑exempt status if eligible.
10. Compliance calendar: Track filing deadlines (annual accounts, confirmation statements, charity returns) and maintain statutory registers.
11. Funding and operations: Put policies in place for grants, membership fees, revenue distribution, reserves and conflicts of interest.
12. Insurance and risk management: Purchase directors’ and officers’ liability insurance where appropriate and adopt safeguarding and financial controls.
Legal, tax and governance considerations
– Articles/constitution: The guarantee amount, restrictions on profit distribution, and dispute resolution should be explicit.
– Tax status: Guarantee companies used for charitable purposes may be eligible for tax exemptions, but they must meet local charity law requirements.
– Reporting: Many jurisdictions require public filing of financial statements and disclosures; charities may have additional transparency obligations.
– Conversion and restructuring: Companies limited by guarantee can sometimes be converted to companies limited by shares or merged, but legal and tax consequences must be assessed.
Frequently asked questions
– How much is the guarantee? The guarantee amount is set in the constitution; common small sums are £1 or similar, but it can be any amount appropriate for the organisation.
– Can a guarantee company pay directors? Yes—directors can be paid if allowed by the articles and lawful in the jurisdiction, but payments should not conflict with non‑profit objectives and must be transparent.
– Can members receive profits? Generally no; the model is designed so surplus funds are retained for the company’s purpose rather than distributed to members.
– What happens on dissolution? Members contribute the agreed guarantee amount toward creditors; any residual funds are applied as the constitution prescribes (often transferred to a similar non‑profit).
– Is a guarantee company the same as a charity? Not necessarily. A guarantee company is a corporate form; it can be a charity if it meets charity law criteria and is registered as such.
Sources and further reading
– Investopedia — “What Is a Guarantee Company?” https://www.investopedia.com/terms/g/guarantee-company.asp
– (For jurisdictional rules, see your local company registry such as Companies House (UK) or ASIC (Australia) and relevant charity regulators.)
Disclaimer
This summary is explanatory and not legal advice. Corporate formation, tax treatment and regulatory obligations depend on local law. Consult a qualified lawyer or accountant in your jurisdiction before forming or operating a guarantee company.