Setting up your limited by guarantee company- Basics, features, and advantages

Introduction:

Imagine a business that’s all yours. The rules and regulations, how it works, the stakeholders - it’s all in your control! This can seem like an impossible dream for busy professionals with their minds already full of legal jargon and company proposals.

But what if we told you that being your boss doesn’t have to be painstakingly difficult- It could even be as simple as setting up a limited-by-guarantee company. That's right - these company structures are personalized companies for entrepreneurs looking for freedom and flexibility in running their businesses.

Now relax, and don't worry about needing to learn every detail of corporate law - this blog post is here to run you through the basics, features, and advantages of what makes up the formation of a company limited by guarantee so you can make those dreams of success come true!

What is a company limited by guarantee?

The term company limited by guarantee refers to an important type of public company, where the member's liability is limited to the amount that they have contributed to the company in the eventuality that it is wound up. This amount is predetermined in a company's constitution and it is usually quite minimal.

It is also important to consider that as a company limited by guarantee is registered under the Corporations Act 2001 (Cth), it must comply with all necessary regulations accordingly. By doing so, a legal entity that is limited guarantee can ensure its ongoing success in the organization's purposes moving forward.

A company limited by guarantee is an advantageous business structure for organizations that are not primarily motivated by profit and work as registered charity businesses. Unlike proprietary companies, the profits generated from the activities of a registered charity are reinvested into the organization and its functions, granting greater financial stability.

While proprietary limited company mainly focus on commercial endeavors, this form of legal structure has frequently been adopted by charities, NGOs, and other not-for-profit organizations that promote positive social change and the well-being of various communities worldwide. It enables them to continue to pursue their unique purpose while also providing the legal permissions to establish themselves as a robust functioning business.

Main features of companies limited by guarantee

Let's explore the key features of a company limited by guarantee next that are distinct from a proprietary company.

• A company limited by guarantee is a type of company structure that is not legally allowed to pay dividends
• Each member of the company gets the right to one vote
• A company limited by guarantee cannot issue shares. Therefore, not for profit organisations with limited by guarantee corporate structure have no possibility of obtaining controlling interest or profit from selling shares
• For-profit and commercial companies usually avoid company by guarantee type of company structure and are mostly preferred by charitable organisations
• The company constitution outlines the guidelines for managing the internal affairs of a company limited by guarantee
• Directors of small and large companies that are limited by guarantee are held to the same stringent expectations as those in fully registered public organizations. They must meet all legal requirements and obligations, highlighted within Australia's Corporations Act
• Companies wishing to engage in business activities and offer securities beyond shares must adhere to the financial reporting obligations and stringent regulations specified by specific sections of the Corporations Act
• Companies limited by guarantee usually conduct an annual general meeting
• A company limited by guarantee can utilize replaceable rules from the Corporations Act. However, when conflicts arise their constitution remains paramount and holds overriding power

How to set up a company limited by guarantee?

Establishing public companies can be an intricate undertaking, particularly when it comes to membership structure. It is therefore paramount that your organization seeks legal advice from lawyers or accountants who are well-versed in setting up not-for-profit companies.

Here are a few areas where you can get professional help concerning setting up public companies as those limited by guarantee.

• Constitution drafting that includes provisions on proxies, voting rights, directors' duties, eligibility, removal, and election of directors, etc
• Advice on whether the public company should be a special purpose company and applicable under Corporations (Review Fees Regulations 2003 (Cth), thereby eligible to reduced Australian Securities and Investment Commission (ASIC) fees while registering with ASIC
• Advice on whether the company should be exempted from adding LTD or limited while registering for the business name.

Types of guarantee companies limited

Companies limited by guarantee are of three types which are outlined below,

• Companies limited by guarantee with annual consolidated revenue less than $1 million
• Companies limited by guarantee with annual consolidated revenue of $1 million or more
• Small companies limited by guarantee

Legal obligations of companies limited by guarantee

A company limited by guarantee has to comply with the following obligations to operate in Australia.

• Companies limited by guarantee must ensure their books and records are reviewed by the company directors
• Organizations need to keep detailed documentation of their member meetings, financial report, and decisions, ensuring a comprehensive record for future reference
• A public company that is registered for charity or non-profit endeavors must adhere to elevated governance standards, be registered under the Australian Charities and Not-for-profits Commission (ACNC)

What rights do members of companies limited by guarantee have?

Members of companies limited by guarantee have certain rights they are entitled to, some of which are outlined below.

• Members have the right of viewing the company's register of members, giving them insight into who is part of their organization
• Members need to be provided with a copy of the company's constitution
• Members have the right to get minutes of the meeting
• A small company's members that are limited by guarantee have the right to unlock meaningful insights into the director's report and financial report if requested by at least 5% of the members
• Members of large companies limited by guarantee have access to financial report or directors report

Advantages of public companies limited by guarantee

Here are some of the advantages that you can expect from setting up a company limited by guarantee compared to other company structures.

• Limited liability

  Limited Liability grants members assurance in the event of a company's dissolution. After winding up of a public company limited, each member is only liable for what they have pledged upfront - typically a nominal fee. With this comfort from risk and potential financial loss, corporate operations are free to focus on productivity and success with improved peace of mind.

• Organization setup

  For those looking to launch a non-profit organization, forming companies limited by guarantee offer certain benefits, unlike other corporate structures. Most notably in a public company limited, members cannot acquire any controlling interest or vote in the organization due to its single voting system; additionally, it prohibits issuing shares and paying dividends. Thus guaranteeing that all resources are devoted solely toward achieving your philanthropic goals!

Disadvantages of public companies limited by guarantee

Despite the advantages, there are some drawbacks to consider when deciding whether a company limited by guarantee is right for you.

• Limited growth potential

  Companies limited by guarantee have no share capital, meaning they cannot raise equity. Therefore, businesses rarely utilize this organizational model and it is more often seen in recreational clubs or not-for-profit entities that require a limited amount of funds for operations. In place of stock offerings to generate money for the business, these organizations find alternatives such as fundraisers, grants, or membership fees instead.

• Regulatory obligations

  A company limited by guarantee faces a complex web of compliance requirements, with variations depending on whether they are classified as 'small' or not. For such businesses, staying compliant is essential to keep operations running smoothly and efficiently. Therefore, it is important to understand the different regulations and laws that apply to this organizational model. Strict adherence can help manage potential risks and maintain legitimacy.

• Perception of ownership

  Given its single voting system, members may feel they lack the power they desire in an organization, with no stake in decision-making or control over the company's direction. Although the organization is not-for-profit, it can be difficult for members to feel as if their voices are heard or considered when there are no provisions for voting on important matters.

Conclusion

To sum it up, setting up limited-by-guarantee companies has its advantages as well as disadvantages. Another thing to take into consideration is that with any type of company, you need to follow all the steps, meet all regulatory requirements, and take your business seriously. Without the proper paperwork and registration, you can't legally operate this type of business.

That's where CleanSlate comes in! Our team will make sure you understand everything about setting up a limited-by guarantee com so that it benefits the people involved and meets your specific needs. A limited by guarantee com could be the right decision for your business - why not give us a call and find out about expert business setup services?