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What is the difference between a company limited by shares and one limited by guarantee?

 

When forming a limited company in the UK, there are usually two routes you can go down. You can either form a company limited by shares – the most popular choice in the UK – or one limited by guarantee, which is suitable for not-for-profit business models. 

 

         

 

Company limited by shares:

 

This is the route you are most likely to go down as a small business owner, as this is the most common business model for a trading company looking to make profit through the sale of goods or services.

 

A company limited by shares also, obviously, will have shareholders. These are the people who have put money into your company to buy a ‘share’ of it. Think of a share a ‘part’ of your company. You can read more about shares and capital interest here. The amount of shares you own translates to your percentage of ownership, therefore, you could – as the business owner – be the sole shareholder, owning 100% of the business. On the other hand, you could sell 100 shares worth the same percentage of ownership to 100 people, and so each would own 1% of your business.

 

Shareholders, especially majority-shareholders, do have a role to pay in the operation of your business. Usually, the majority-shareholders must have a say on any ‘big’ decisions being made in the company, such as name changes or a move to liquidation.

 

Shareholders can pay for their shares overtime, and so some businesses find themselves in a situation where they force shareholders to give up their percentage of ownership as they simply can’t make the payments. Shareholders may also make profit on the sale of their shares and dividends. If your company value goes up, so does the value of its shares.

 

The shareholders of a company limited by shares are wholly liable if the company becomes insolvent and moves into liquidation, therefore, they must cover any debts by the sale of theirs shares and business assets.

 

Company limited by guarantee:

 

In a company limited guarantee there are no shares or shareholders. Companies, instead, have ‘members’ whose roles are set out by the articles of association, which also binds them to the company.

         

In comparison to shareholders of a company limited by shares, members have a limited liability, but are bound to the business, and so have to cover any debts it incurs. However, this is only up to a fixed amount – usually £1 – and so not all company assets etc. will have to be sold to cover costs.

 

Companies limited by guarantee are usually non-profit, and so take the form of charities, associations and social enterprises, which have certain goals of improving society in different ways. There are, however, profit-based business limited by guarantee, and not-for-profit companies limited by shares, such as CICs – but this is less common.

 

The lack of shareholders is purposeful so that profits made by the company cannot be redistributed to individuals but, instead, are re-invested within the business venture/charity to further its goals.

 

Companies limited by guarantee – much like charities – are usually set up with a list of so-called ‘objects’, these are things that profit and funding can be spent on. If you form a company limited by guarantee, you can apply to become a charity via the Charities Commission.

 

Companies limited by guarantee, exempt under Section 60:

 

This type of company is the same as a that described above except, under Section 60, this company limited by guarantee is not allowed to use the word ‘Limited’ – or affix ‘Ltd’ – in its company or trading name. This, generally, only applies to charities or companies which must re-invest all wealth in the business – as defined in the articles of association.  

 

If you want to form a company limited via shares or guarantee, you can do both with Smarta Formations today.

 

 

 


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