Save content
Have you found this content useful? Use the button above to save it to your profile.
iStock00000242782_Medium

Companies limited by guarantee: Get the details right

by
28th Apr 2015
Save content
Have you found this content useful? Use the button above to save it to your profile.

The previous article under this headline continues to be one of the most read articles published on AccountingWEB, attracting over 63,250 views to date, despite originally being written in 2011.  

Companies Limited by Guarantee (CLG) are an alternative form of company entity to the usual one with share capital, the difference being that its owners are guarantors (members) rather than shareholders.

The only companies that must be CLG are charities and Community Interest Companies (for further information on CICs see ‘Not for profit companies: Get the details right’) 

Other entities such as non profit-making companies, sports associations (e.g. the England and Wales Cricket Board), clubs, membership organisations and residential property management companies can all be CLG’s but are not legally required to be so.

NOTE: Charitable Incorporated Organisations (CIO) are a new form of limited company with reduced regulatory requirements and are not CLG (for more detail on CIO). 

The difference between CLG’s and companies limited by shares

  • The incentive for members to become involved is commitment to the company’s objectives rather than profit as with shareholder companies.
  • CLG companies cannot be incorporated with share capital (s5 Companies Act 2006) which makes this type of company less likely to become insolvent. NOTE: pre-22 December 1980, it was possible to form a CLG with share capital, such that there are some CLG in existence where member shareholders have contributed capital to the company.
  • Members guarantee that they will contribute a nominal amount should the company be wound up either whilst they are members or within one year of them ceasing to be so. The Model Articles for CLG state that this amount be £1.
  • CLG have different Articles. The CLG Model Articles contains one Article rarely seen in share companies – article 4 gives members the power to ‘direct the directors to take, or refrain from taking, specified action’.

Advantages

  • The personal assets of the members are not held liable if the company becomes insolvent. However, such protection is only available if the Management Committee/Trustees/Board can demonstrate that it has acted with ‘due care and diligence’ to ensure that they do not leave themselves open to claims of negligence. This means meeting on a regular basis, preparing and scrutinising financial reports, submitting accounts and returns to HMRC and Companies House as required. The directors of the company will only incur personal liability if they have been guilty of some wrongdoing (e.g. wrongful or fraudulent trading s170-177 CA2006).
  • Provides a democratic structure - the members elect the board and have the right to remove them.
  • CLG’s are suitable for any size of organisation enabling a small organisation to expand without restriction.
  • A defined set of objectives as per the constitution may make it easier to ensure that money is spent according to a donor’s wishes.
  • A legal entity in its own right, contracts are undertaken in the name of the company thereby protecting the liability of the individual members, who may only be involved voluntarily. Such contracts include the usual employment contracts, contracts for the purchase of goods as well as for the purchase of property.
  • No requirement to issue member certificates.
  • There can be different classes of member reflecting different classes of rights (e.g. non-voting members or members who have restricted voting rights).

Disadvantages

  • Statutory requirements of submission to HMRC and Companies House are the same as for companies limited by shares. Hence similar costs incurred for the keeping of proper accounting records, filing of annual returns (see ‘Accounts and tax position’).
  • Lack of privacy for individual board members as personal details submitted to Companies House are available to the public as with a company limited by shares; members details are not recorded.
  • CLG cannot raise finance by the issue of shares.

Company administration matters

  • CLG members are required to comply with the same legal rules and requirements as other limited companies (e.g. at least one director, submit an Annual Return and Accounts to Companies House).
  • Subject to the same rules for winding up of the company (i.e. can be compulsory liquidated).
  • Companies House list director’s names in the same format as shareholders. There are no members details held at Companies House, the only public record being the Register of Members held at the company’s Registered office.
  • Specialised Articles of association.
  • Normally one vote per member whatever the amount of guarantee contribution. If there are differing amounts of guarantee there should be a clause in the Articles to confirm one member one vote. The Model Articles does not contain such a clause.
  • A copy of the full accounts is required to be sent to members so long as they have the members’ current address (s423 CA 2006); summary statements can only be sent by companies that are not required to have an auditor’s report (s4 Companies (Financial Statement) Regulations 2008). This could be a large cost better spent so the Articles should be amended to state that all members are deemed to have consented to communication by email or website (s333 CA 2006) otherwise the specific consent of each member must be obtained.
  • A CLG company need not have ‘Limited’ or ‘Ltd’ after its name if it is a charity or the company has been set up ‘for the promotion or regulation of science, education, religion, charity’ so long as ‘the income is used in the promotion of the objects’ (s 60 CA 2006)

Distribution of profits

  • Profits can be distributed unless prevented from doing do in the Articles. Pre 23 April 2013 the Model Articles included a clause prohibiting distribution of surplus profits, rather to reinvest, such that all profits were applied to the purpose for which the company was established. There is no mention of distribution of profits in the current Model Articles.
  • Payments to board members can be made as remuneration or repayment of expenses.
  • If the CLG is a charity the Charity Commission has strict guidelines regarding payment to board members/trustees.
  • Members do not have claim upon the company’s assets.

Accounts and tax position

  • The accounting, tax treatment and filing deadline rules are exactly the same as for a company limited by shares (e.g. CT600 return and accounts to HMRC, corporation tax being charged on any profit (unless a charity or the turnover limit is breached for a Community Amateur Sports Club)).
  • A Community Amateur Sports Club is exempt from paying corporation tax if the turnover from trading is less than £50,000 and the whole of the profit is applied for qualifying purpose.
  • There will be no share capital shown on the Balance Sheet and there needs to be a note confirming Limited by Guarantee status.
  • CLG will be subject to the same FRS 102 and FRS 105 regime. (For commentary of the adoption by small charities of FRS 102 see here) and for charities preparing consolidated accounts.
  • All CLG’s except charities can take advantage of the Micro-Entities legislation.
  • If the company is a registered charity, the Charity Commission rules must be complied with.

Cessation of a CLG

  • In the event of the company being wound up all assets are usually passed to another similar CLG organisation – this should be confirmed in a dissolution clause in the Articles. The Model Articles makes no provision for this.
  • There is no facility under CA2006 to permit a change from a CLG to a company limited by shares - the CLG must be liquidated and a new company limited by shares incorporated.
  • A charity needs to be removed from the Companies House register before advising the Charity Commission.

Practical Point

A CLG cannot be incorporated using Companies House online registration. A paper form IN01 must be completed and submitted by post taking 8 to 10 days working days to process at a cost of £40. Suggest use a company formation service which will take 2 days and cost the same.

Jennifer Adams FCIS TEP ATT (Fellow) is Associate Editor of AccountingWEB. A professional business author specialising in corporate governance and taxation, she has written for many of the leading specialist providers of legal, tax and regulatory publications. Jennifer runs her own accounting and consultancy business with offices based in Surrey and Dorset.

Tags:

Replies (6)

Please login or register to join the discussion.

avatar
By [email protected]
16th Jun 2015 16:30

CKG & Corporation tax

I am trying to determine the corporation tax status of a golf club set up as a CLG. The club's articles state that surpluses are all to be used for the purposes of the club and not distributed. Thus there are no distributable profits. Would I be right in thinking that there is therefore no corporation tax liability so long as the arrangement stays as described?

Thanks (0)
avatar
By Alan Jepps
11th Nov 2016 13:46

The main income of a property management company which is limited by guarantee is the service charge payable by owners for maintenance of communal property, mainly the grounds in which the houses are situated.
Can this situation be reported on normal company accounting rules?

Thanks (0)
avatar
By Alan Jepps
11th Nov 2016 13:46

The main income of a property management company which is limited by guarantee is the service charge payable by owners for maintenance of communal property, mainly the grounds in which the houses are situated.
Can this situation be reported on normal company accounting rules?

Thanks (0)
avatar
By Alan Jepps
11th Nov 2016 13:46

The main income of a property management company which is limited by guarantee is the service charge payable by owners for maintenance of communal property, mainly the grounds in which the houses are situated.
Can this situation be reported on normal company accounting rules?

Thanks (0)
avatar
By Alan Jepps
11th Nov 2016 13:46

The main income of a property management company which is limited by guarantee is the service charge payable by owners for maintenance of communal property, mainly the grounds in which the houses are situated.
Can this situation be reported on normal company accounting rules?

Thanks (0)
avatar
By Paul Crowley
20th Dec 2021 15:53

Most read this week per the listings

Thanks (0)