What is a Company Limited by Guarantee? A Guide to Solve All Your Doubts.
Table of Contents
Introduction
We come across various entities that work for a social cause. These entities are not always registered under section 8 of the Companies Act 2013. There are so many types of companies that operate in the market today. Not all of them share a similar structure or financial model. The liabilities of their members differ, too. Why is that?
The Companies Act 2013 lists three types of companies based on the member’s liability. They are:
- Company Limited by Shares,
- Company Limited by Guarantee, and
- Unlimited Company.
The liability of members is limited to a certain extent in the first two cases. This protects the members of the company from the acts of the entity. A company limited by guarantee is a popular type of company that offers various advantages. This is because of its features, structure, and its financial model. What is a company limited by guarantee? Read below to know more!
Company Limited By Guarantee Meaning
Section 2(21) of the Companies Act 2013 explains the concept of a company limited by guarantee (CLG). This company does not work on the mechanism of share capital. Companies Act 2013 has put forward the following definition of a company limited by guarantee:
A company limited by guarantee is 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.
By reading the above definition, we can understand that a CLG is a legal entity without a share capital. Most of the time, they are established for non-profit motives. The structure and working of the company are ideal for organizations like trade associations, clubs, charitable trusts, institutions working for society, and groups that focus on promoting a cause or service.
The members of the company, known as the guarantors, get rights similar to shareholders of the company. Unless any special provision is written in the articles, the members can attend the general meetings and vote in the company. They also get the right to appoint and remove any or all of the company’s directors. The members get the supreme control over the company.
The member’s liability is not based upon the value of the share that they hold in the company. Instead, this liability is limited to their guarantee, a predetermined amount that members agree to pay in case the company decides to wind up.
What is a company limited by shares and how is it any different?
A company limited by shares is run by its members, too. But these members are the shareholders of the company. A share is a small portion of the company’s capital. Owning the shares means owning a portion of the company. Anyone can own these shares. However, a private limited company has restrictions placed on the transfer of shares.
Even if a company limited by shares and a company limited by guarantee seem similar at first glance. However, their financial structures and working conditions are considerably different. Some of these differences are:
- Members of the company:
The members of CLG are known as guarantors. They guarantee an amount that they can pay in case the company decides to wind up. The members of the company that have a share capital are known as its shareholders.
- Liability:
The liability of the members of a company limited to shares is capped to the nominal value of the shares subscribed by him. They do not have to incur any losses beyond the nominal value of these shares. Unlike the members of the CLG, they do not have to predetermine any amount of liability that is difficult for them to bear.
- Involvement of any regulatory bodies:
The business operations of a company limited by shares are controlled by the Ministry of Corporate Affairs and market regulatory bodies. CGL is operated by the guarantors and takes all decisions for the benefit of the company.
Features of Company Limited by guarantee
Not for Profit motives
Most CLGs are run to attain charitable motives. The profits earned by these entities are reinvested to support the company’s activities and goals. These profits are not distributed as dividends.
Company Limited by Guarantee Members
Members of CLG do not possess the shares of the company. They claim the ownership of the companies through the guarantee of paying up a certain amount of liability. These members are called guarantors.
Zero Share Capital
A company limited by guarantee, India, does not own a share capital. The guarantors have fixed a predetermined amount that they pay during the winding up of the company.
Limited Liability
The liability of members of the company is limited by the guarantee undertaken by them.
Perpetual Succession
A CLG enjoys a long-term existence. It does not depend upon its members to continue with its activities. Members may come and go but the company will keep going ahead.
Regulatory Framework
CLG is governed by the Companies Act, 2013. The act has laid down the statutory and annual requirements that the company has to follow regularly. Companies will also have to properly maintain the records and books of accounts for the current and previous 7 financial years.
How to form a company limited by guarantee under the Companies Act 2013
The Companies Act has laid down a clear and simple procedure to register a CLG. The process of registration includes the following steps:
- Approval of Name
- Drafting the Memorandum Article of Association
- Filing with the Registrar
- Receiving the Certificate of Incorporation
Step 1: Approval of Name
Deciding the name of your entity is a crucial step in registering your company. It is important to check the availability of the name that you have selected for your company. You can check the availability of the name on MCA’s official website. Simply fill in the search field and click enter to analyze the availability of your name. You can also use professional help to avoid any copyright issues in the future. Ensure your business gets your desired name.
Step 2: Draft the Memorandum and Articles of Association
The Memorandum of Association (MoA) is an important document where the company lays down its objectives. It includes various important clauses that are essential to establishing and managing a company. It also includes the clauses associated with the share capital of the company.
The Articles (AoA) lay down the rules and regulations associated with the operations of the company. It states the relationship of the company with its employees. Together, the MoA and the AoA are considered as the company’s constitutions.
It is important to draft these documents carefully. It is essential to mention that the company is a company limited by guarantee in the MoA. Mention the name of their members and the liability undertaken by them. Other clauses have to be drafted carefully, too.
Step 3: Filing the Documents with the Registrar
The next step to register the company includes filing the various mandatory documents with the registrar. You will have to file the declaration of compliance, list of members, directors, and other necessary forms with the RoC. This compliance can take up a lot of time. Filing the wrong documents or details can also lead to rejection of your application.
Avoid all the hassle with the help of a professional. You can hire a Lawyer, a CA, or a CS to help you with the knits and bits of the process. Check out Lawgical Adda’s services today!
Step 4: Receiving the Certificate of Incorporation
The RoC (Registrar of Companies) will issue a Certificate of Incorporation in the form of INC 11. RoC will do so once it is satisfied that the submitted documents are valid. The certificate speaks as evidence of the existence of the company. It includes the date of Incorporation as well.
How is a CLG governed?
The governance of a CLG is similar to any other company. It has a set of Board of Directors who are responsible for its management. The board holds the responsibility to direct and manage the company strategically. Directors are appointed by AoA. They are expected to leave behind their gains and act in the best interest of the company.
The company is expected to hold regular general meetings. They need to hold at least one Annual General Meeting. Members can attend these meetings and vote on important matters.
The company needs to maintain its finances and manage its activities accordingly. The financial statements need to be audited annually. The company must also adhere to mandatory statutory compliances and file the returns on time. They need to maintain their registers and comply with regulatory frameworks laid under the Companies Act 2013.
Examples of companies limited by guarantee
There are various companies limited by guarantee that have turned exemplary for every entity that has a goal in mind. Here is a company limited by guarantee example in India:
Teach for India
Teach for India is a non-profit organization. It aims to eradicate educational inequality and illiteracy in the nation. Operating as a company limited by guarantee, the structure of the entity aims to maintain transparency and accountability in its mission. It reinvests its profit in fulfilling its goals.
CRY (Child Rights and You):
CRY is another company limited by guarantee example. CRY is a not-for-profit organization that works extensively to protect and promote children’s rights. Being a company limited by guarantee ensures that the organization reinvests its funds and manages its work effectively.
Companies limited by guarantee play an important role in the country’s corporate atmosphere. It opens new doors of opportunities for investors. Benefits like limited liability and perpetual succession attract various businessmen.
Also, the regulatory bodies have ensured safety by making diligent compliance and management mandatory. These companies can surely ensure growth in both the corporate and social sectors.
FAQ:
What is a public company limited by guarantee?
A public company limited by guarantee is a public company. The liability of the members of this public company is limited to a predetermined amount undertaken by them. They have to follow all compliances of a public limited company.
What are the examples of a company limited by guarantee?
Teach for India and CRY are some of the best examples of a company limited by guarantee. Teach for India is a non-profit organization. It aims to eradicate educational inequality and illiteracy in the nation. CRY is a not-for-profit organization that works extensively to protect and promote children’s rights.
What is the difference between a limited company and a company limited by guarantee?
A limited company refers to a company limited by shares, that is, the liability of its members is limited to the nominal value of shares held by them. Even if a company limited by shares and a company limited by guarantee seem similar at first glance. However, their financial structures and working conditions are considerably different. You can read more about these differences above.
