NOTE: This article has been updated as at June 2016. The comments refer to the original article published in August 2011.
On reading AccountingWEB’s Any Answers it would appear that not many accountants have come across ‘Companies Limited by Guarantee’ (CLG) in their working life, explains Jennifer Adams.
When they do, they are unsure as to what they are, how to prepare the accounts and what needs to be submitted to the authorities - this article answers such questions.
What are Companies Limited by Guarantee?
Companies Limited by Guarantee are an alternative form of company entity to the usual one of share capital; its members being guarantors rather than shareholders.
Charities (e.g. Oxfam), sports associations (e.g. the England and Wales Cricket Board), Clubs, membership organisations, residential property management companies.
Why be a Company Limited by Guarantee?
- 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
- CLG members are required to comply with the same legal rules and regulations as other limited companies
The difference between companies limited by shares v guarantors
- The main difference is that the liability of shareholders is limited to the amount unpaid on the shares; whereas the liability of guarantors is limited to the amount of any outstanding guarantee.
- This guarantee amount is usually £1 per member; the liability is therefore limited to this amount
- CLG companies cannot be formed with share capital (s5 Companies Act 2006) which makes this type of company unsuitable for commercial enterprises and as such less likely to become insolvent. NOTE: pre-22 December 1980, it was possible to form a CLG with share capital, such that you may come across some CLG companies where a few member shareholders have contributed capital to the company
- The incentive for members to become involved is commitment to the company’s objectives rather than profit as with shareholder companies.
- 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’. This means meeting on a regular basis, acting as a company preparing and scrutinising financial reports, submitting accounts and returns to HMRC and Companies House to ensure that they do not leave themselves open to claims of negligence
- The company undertakes activities in its own right
- It provides a democratic structure - the members elect the board and have the right to remove them
- The CLG framework is suitable for any size of organisation enabling a small organisation to expand without restriction
- The defined set of objectives may make it easier to ensure that money is spent according to a donor’s wishes
- Statutory requirements of submission to HMRC and Companies House being 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
- CLG cannot raise finance by the issue of shares
Company administration matters
- Same statutory requirements as for a company limited by shares (e.g. at least one director)
- Members details, when are listed as directors, are listed in the same format as shareholders in Companies House records although no SH01 Form 88 (Return of Allotments) is used as there are no shares to allot (minor amendment subsequent to publication- ed)
- Specialised memorandum and articles of association (see above)
Distributing profits/commercial status
- As there are no shares any company profits cannot be distributed to the members as dividends; members also cannot have claim upon company assets
- Pre 28 April 2013 the Model Articles for companies limited by guarantee included a clause prohibiting distribution of surplus profits but rather to reinvest them such that all profits were applied to the purpose for which the company was established. The current Model Articles are silent on the subject.
- Payments to board members can only be as remuneration (unless repayment of expenses only) and not dividend
- If the CLG is a charity the Charity Commission has strict guidelines regarding payment to board members/trustees
Accounts and tax position
The accounting, tax treatment and filing deadline rules are exactly the same as for a company limited by shares (i.e. CT600 return, accounts to HMRC and Annual Return and Accounts to Companies House) except:
- no share capital is shown on the balance sheet. A note should state that the company is Limited by Guarantee
- the final line on the balance sheet to read ‘Reserves’ and not ‘Shareholders Funds’ as Companies House have been known to reject if incorrectly described
- Any excess of income over expenses is referred to as ‘Surplus’ not ‘Profit’
- If the company is a registered charity, the Charity Commission rules must be complied with
Community Interest Companies (CIC)
CIC’s are companies that were created to fill a gap for non-charitable social organisations. 75% are CLG and they vary in size from small community-based organisations to multimillion pound businesses.
Their assets, income and profits are required to be used only for the benefit of the community subject to an ‘asset lock’ which ensures that the assets are retained within the company. Following registration with Companies House a separate application form and copy of the Articles are sent to the Regulator of Community Interest Companies, to confirm that the company satisfies a ‘community interest’ test.
‘Mutual’ trading companies
Small, not-for-profit, non-charitable CLG are allowed to carry on a trade purely between its own members. They are deemed to trade "mutually" and as such are exempt from Corporation Tax. (HMRC - BIM24025. Ayrshire Employers' Mutual Insurance Association Ltd v CIR 27TC331).
Jennifer Adams FCIS TEP ATT (Fellow) is Consulting Editor of AccountingWEB and is a professional business author specialising in corporate governance and taxation. She runs her own accounting and consultancy business with offices based in Surrey and Dorset.