Companies limited by guarantee (CLG) are a unique business structure commonly used by non-profits, charities, and community groups. In this guide, we’ll cover everything you need to know about CLGs, including their features, benefits, drawbacks, and how to set one up.
What is a company limited by guarantee?
A company limited by guarantee (CLG) is a type of business structure that doesn't have shareholders or issue shares. Instead, it is owned by members who guarantee to contribute a set amount (often as little as £1) towards the company’s debts if it is wound up. CLGs are particularly popular for organisations that operate for the public good rather than for profit, like charities, sports clubs, and educational institutions.
Key features
CLGs have several distinct features that set them apart from other business types:
No shareholders or share capital: Unlike companies limited by shares, CLGs do not have shareholders.
Limited liability: Members’ liability is capped at the amount they guarantee, protecting their
personal assets from company debts.
Profit reinvestment: Any surplus generated is typically reinvested into the company rather than used as profit.
Clear objectives: Most CLGs pursue a specific purpose, such as community service or environmental protection.
Legal compliance: Like other registered companies, CLGs must comply with UK company law. This includes filing annual accounts and returns with Companies House.
What is a statement of guarantee?
A statement of guarantee is a formal declaration made by each member of a company limited by guarantee. It outlines their commitment to contribute a specified amount if the company is wound up while they are a member (or within a year after they leave). This guarantee ensures that:
The company’s debts and liabilities are settled
Costs and expenses related to winding up are covered
Member contributions are calculated and distributed accordingly
💡Editor's insight: "I like to think of a company limited by guarantee as one that promotes social good. They tend to reinvest their profits back into their causes. Plus, CLGs can't issue shares, so they don't profits in the traditional sense."
What are the advantages of a company limited by guarantee?
A company limited by guarantee (CLG) offers a number of benefits. Some of these include:
1. Limited liability for members
The members' liability is restricted to the amount they guarantee. In doing this, it protects their personal assets from the company’s financial obligations. This safety net makes CLGs an attractive option for individuals who want to support a cause without a big financial risk.
2. Separate legal entity
A CLG is legally distinct from its members. This means the company can enter contracts, own property, and employ staff in its own name. This separation provides clarity and legal security, especially for larger non-profits.
3. Enhanced credibility and trust
The formal structure of a CLG, along with its legal compliance, can foster trust among stakeholders and partners. This is especially important for charities and organisations looking for funding or public support.
4. Tax benefits for charitable CLGs
If the company registers as a charity, it can access significant tax advantages. These include exemptions from Corporation Tax, reduced business rates, and eligibility for Gift Aid, allowing the organisation to maximise its resources.
5. Profit reinvestment
Unlike commercial entities, CLGs typically reinvest income into the organisation’s goals. This focus on reinvestment helps ensure that resources are dedicated to fulfilling the company’s mission. This might include things like funding projects or community services.
6. No shareholder conflicts
The absence of shareholders removes the risk of disputes over profit distribution or ownership rights. This simplifies decision-making and keeps the organisation focused on its purpose rather than profit-making.
7. Flexible governance
The memorandum and articles of association allow for tailored governance structures. It gives CLGs the flexibility to design decision-making processes that suit their specific needs and objectives.
What are the disadvantages of a company limited by guarantee?
While companies limited by guarantee have numerous benefits, there are some limitations and challenges to be aware of:
1. Administrative and compliance
CLGs must comply with the same legal requirements as other registered companies. This includes filing annual accounts and submitting confirmation statements to Companies House. These responsibilities can be time-consuming and may require professional assistance, adding to costs.
2. Limited access to capital
Unlike companies limited by shares, CLGs cannot raise funds through equity investments because they do not issue shares. This can make it challenging to attract significant investment or funding outside of grants and donations.
3. Lack of profit distribution
Because profits must generally be reinvested into the company’s objectives, a CLG is not suitable for groups looking to generate personal financial returns. This limits its appeal to potential investors or entrepreneurial ventures.
4. Restrictions on activities
The primary focus of a CLG is fulfilling its stated objectives. Some profit-driven activities may be restricted depending on the company's structure and purpose.
5. Difficulties with governance and decision-making
With no shareholders, there can be fewer ownership disputes, However, governance can still be a challenge. In larger CLGs with multiple members, achieving consensus on key decisions can take time and effort, potentially slowing progress.
6. Perception as a non-commercial entity
The public may perceive CLGs as non-commercial, even if they engage in income-generating activities. This could limit opportunities for partnerships or collaborations with for-profit organisations.
Real life examples of companies limited by guarantee
Companies limited by guarantee (CLGs) are widely used in the UK. Here are some real-world examples of entities that commonly adopt this structure:
Charitable organisations
Charities often operate as companies limited by guarantee. This is so they can achieve their mission while benefiting from limited liability and legal status. For example:
The National Trust: One of the UK’s most well-known conservation charities, The National Trust operates as a CLG, focusing on preserving historic sites and natural landscapes.
British Red Cross: This humanitarian organisation operates under a CLG structure, enabling it to manage donations and implement charitable initiatives across the UK and abroad.
Non-profit sports clubs and associations
Many community sports clubs and recreational organisations adopt the CLG model to promote participation in sports without focusing on generating profits. Examples include:
Local football or cricket clubs: Many grassroots sports organisations are CLGs, allowing them to apply for grants and funding to support community involvement..
Educational and training organisations
Education-focused entities that provide skills development or community training often choose the CLG structure. For instance:
The Open University Students Association: This organisation exists to support and represent students of The Open University and operates as a company limited by guarantee.
Professional associations and regulatory bodies
Many industry associations and governing bodies operate as CLGs. This is largely so they can maintain independence and accountability. Examples include:
The Law Society of England and Wales: This professional body operates as a CLG to ensure transparency and member-focused operations.
Community interest companies (CICs)
While CICs are a separate legal entity, many of them adopt the CLG framework. Examples include organisations that address local issues such as food banks, mental health support, or environmental protection projects. You can learn more in our full guide to what is a CIC.
Environmental organisations
Environmental non-profits often find the CLG structure ideal. One of the most known examples includes:
Friends of the Earth (UK): This environmental group campaigns for ecological preservation and operates under a CLG model.
What do you need to set up a CLG company?
Setting up a company limited by guarantee in the UK involves several steps:
Choose a name: Your company name must be unique and comply with UK naming regulations.
Define objectives: Clearly outline the purpose of your company, as this will influence your constitution and operations.
Appoint directors and members: CLGs must have at least one director and one member, but these can be the same person.
Prepare a constitution: Draft a memorandum and articles of association, detailing the company’s rules, objectives, and governance structure.
Register with Companies House: Submit your incorporation documents online or by post, along with the required fee.
Obtain a company number: Once registered, your company will receive a unique company number and a certificate of incorporation.
Register for taxes: Depending on your activities, you may need to register for Corporation Tax, VAT, or other taxes with HMRC.
FAQs
Can a company limited by guarantee pay a salary?
Yes, a CLG can pay salaries to its employees and directors. However, if the company is a registered charity, it must ensure that salary payments align with its charitable objectives.
What does limited by guarantee mean?
'Limited by guarantee' is a company structure where members agree to contribute a fixed amount towards the company’s debts if it is wound up. Unlike shareholders in a traditional company, members of a CLG do not own the company or receive profits.
Final thoughts
Companies limited by guarantee (CLGs) are a great option for organisations with non-commercial goals. Their limited liability, separate legal status, and flexible structure make them a practical choice for many. That said, it’s important to consider the challenges too. Speaking with a legal or financial expert can help you make the right decision and set your organisation on the path to success.
Looking for legal advice? Get in touch today to see how our small business lawyers can help.
References
Limited companies by Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.