A limited company is a relatively normal and popular type of company formation that includes shareholders who own a number of shares within the company. Regular shareholders within a limited company usually purchase shares in the hope of profiting from them. However, this type of company may not be suitable for non-profit organisations, charities and social enterprises. In this situation, the business would be formed as companies limited by guarantee or LBG. But how does this work and how is it done?

Overview of companies limited by guarantee

A non-profit company can exist for a range of reasons. It may be a charity, a community group, voluntary organisation or an enterprise creating income for social objectives rather than for its own profit. Some profit making businesses can use this format but a limited by shares formation is more suitable for the majority as this allows profits to be distributed to shareholders as dividends.When forming a company limited by guarantee, the business must still be registered with Companies House. But instead of having shareholders to declare, the owners are classed as members and are limited by guarantee, so the company is to be bound by financial guarantees rather than by shares. This means that surplus business income, or profits made by the company, isn’t distributed to the guarantors but is retained for the aims of the organisation, such as the charity cause or social project.A limited by guarantee company is still viewed as a distinct entity in the eyes of the law so the company is responsible for assets, surplus income and debts in the same way as a regular limited company. Company members are known as guarantors and are protected by limited liability. This means their financial obligation to the company is limited to what they have guaranteed to pay should the company become insolvent. There is no legal liability beyond this for any debts the business has built up.

Owners and managers

In a company limited by guarantee, the members are the owners of the company, referred to as guarantors. There are no shareholders and there can be one or many guarantors, so you can set up your own company limited by guarantee, or you can be involved with other members.When the company is formed, there must be at least one director appointed to be in charge of managing the day to day affairs. Guarantors can be directors so there can be a single person in charge of the company.

Why choose this type of company formation?

There are pros and cons to this kind of company formation that makes it suitable under specific circumstances. For example, when this type of company is used for a charity of other non-profit organisation, information about the company is viewable on the public register and this gives the company a professional image along with complete transparency.It also allows third parties to make informed decisions about becoming involved with the company based on publicly available information. This has been shown to increase trust in the company and shows great commitment to the cause.Being a LBG company does mean that an annual return must be filed with Companies House and all necessary annual financial reports are delivered to HMRC for tax purposes. Directors are also required to file for Self-assessment each year if they receive any payments from the company and changes to any registered details must be updated accordingly.

Company formation service

Your Virtual Office offers a company formation service for anyone wishing to set up a limited by guarantee company and makes the process simple, straightforward and time efficient.There is an easy to use online form to complete to allow us to gather the correct details to file the relevant information with Companies House to form the company. We can also provide the relevant documentation for you to hold to prove the formation of the company. Once we have all your information in place we can get your company officially registered in as little as four hours during a normal working day.In addition, we can also offer several services that may be of assistance to your new company. These include our mail forwarding service and the use of a central London address to add further prestige to your professional business image. Our aim is to provide services that allow business owners to concentrate on the purpose of their non-profit company while allowing us to efficiently manage the time-consuming day to day tasks on your behalf.

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