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Companies limited by guarantee are known as LBGs
Companies limited by shares are known as LTDs
LBGs are organisations that are given legal personality by being registered at Companies House. They can own property, enter into contracts, employ people, make investments, buy and sell services, incur debts and have bank accounts. LBGs are independent of their owners (known as members or subscribers or guarantors). The key feature of the limited liability legal structure is that owners, management or members of any management committee are not liable for an LBG’s debts; it must meet its obligations from its own funds.
The members of an LBG are its owners and are similar to shareholders. However, they do not
invest any money in the enterprise; they simply guarantee a fixed sum such as £1. If the company gets into financial difficulty, its liquidator can only ask the members for the amount they have guaranteed.
There are a number of significant differences in the constitutions of LBGs and LTDs, which makes LBG a popular choice for non-profit organisations such as Charities, Foundations,Community Interest Companies, Sports Clubs and Social Clubs. LBGs are also used by other non-profit organisations such as Trade, Research and Professional Associations. The LBG format also makes them popular with funding bodies.
Comparing LBGs with LTDs
- Shareholders own an LTD, but the directors are the ones who manage it on a day-to-day basis. Members are the owners of an LBG and are generally involved in its running, either on a day-to-day basis or by being committee members.
- The shareholders’ interest in an LTD is driven by profit and they hope to receive dividends and distributions from the company. The involvement of members in an LBG is motivated by the achievement of the non-profit aims of the company.
- Shareholders pay for their shares in an LTD, and then have no further financial obligations. Members of an LBG do not pay for their membership; they simply offer a guarantee of a fixed sum, such as £1 or £10, which can be called upon if the company becomes insolvent. Most LBG Articles of Association state that members’ guarantees remain in place for 12 months after membership ceases.
- Shareholders can buy and sell shares in an LTD. Members of an LBG cannot sell their membership. However, the LBG will have rules relating to the admission of new members and the discontinuance of existing members.
- Shareholders’ voting rights are determined by the number of shares they hold in an LTD. Thus, a shareholder with 60% of the shares issued will have 60% of the votes, irrespective of how many other shareholders exist. Members in an LBG have equal voting rights, i.e. 1 member 1 vote.
- The share capital model of LTDs lends itself to raising additional capital by the simple process of issuing more shares. LBGs have to rely on donations and grants from people and agencies who do not require a profit for their financial contribution.
LBGs must submit annual corporation tax returns and are taxable in the same way other registered companies are. However, there are a few exception.
- If an LBG is also registered as a Community Amateur Sports Club (CASC), then it will be entitled to various tax reliefs and exemptions.
- An LBG that is also registered with the Charity Commission will benefit from the exemptions and reliefs available to Charities.
- An LBG that has a gross income of less than £5000 cannot be registered with the Charities Commission. However, if its Articles of Association are drafted in the same way as a charity’s, then it can apply to Her Majesty’s Revenue and Customs (HMRC) for the exemptions and reliefs available to a registered charity. Once its gross income exceeds £5000, it will have to register with the Charity Commission in order to retain the tax exemptions and reliefs.
Annual Compliance Obligations
LBGs have the same compliance obligations as LTDs
- Preparation of yearly accounts which need to be submitted to Companies House
- Completion and submission to Companies House of an Annual Confirmation Statement along with a filing fee of £13
- Corporation Tax returns are required to be submitted each year to the HMRC In addition:
- If an LBG is registered with the Charity Commission, it will also have to file a set of figures with the Commission each year. Charity Commission accounts will need to be in a different format to the accounts required by the Companies Acts.
Articles of Association
Each LBG has a written constitution called the Articles of Association which sets out how that company is run and conducts its business. The Articles of Association are a public document that can be accessed from the Companies House website.
There are a number of clauses that characterise an LBG and these depend on its purpose. The Usual Clauses common to all LBGs are as follows.
- The liability of each member is capped at the amount stated in the articles and is usually £1, but can be anything the founders decide.
- Each member is liable for the amount stated during the time he or she is a member and for up to one year after membership ceases.
- The members are required to give 7 days’ notice to withdraw their membership.
- Directors are entitled to remuneration and expenses. The level of remuneration is tacitly subject to approval by the members.
A company limited by guarantee can make a profit, but distributing that profit is not so easy without the mechanism of share capital.
Clauses specific to a “non-profit” LBG
In addition to the clauses referred to above, the clauses listed below are added to the Articles of Association if an LBG company is intended to be not-for-profit. Our LBG pack comprises the following clauses.
- Non-distribution clause: Profits are to be utilised only for the purpose for which the company was set up. The profits cannot be distributed to the members.
- Asset Lock: In the event of a company being liquidated or if the company ceases to operate, any assets or reserves left over after settling any liabilities are to be given to another asset-locked company or charity which has the same or similar beneficiaries. Clauses specific to a “non-profit” LBG who wish to be exempt from ending its company name with the suffix “LTD” or “Limited” should be mindful of the following. A company can claim the above exemption (also referred to as “section 30” after the clause in the 1985 Companies Acts started to allow this exemption and is now replaced by S60 of the 2006 Companies Act) if its objects are the promotion or regulation of commerce, art, science, education, religion, charity or any profession and anything incidental or conducive to those objects and whose profits or surpluses will be used for the sole purpose of achieving those aims.
- LTD exemption: Include a statement of aims in an objects clause in the Articles to utilise the suffix exemption. When using the appropriate product on our website, you will be offered the option to download the Articles of Association. At Clause 4, you insert a sentence stating the purpose of your LBG and as long as it meets the definition above, Companies House will grant you that exemption.
Clauses that make your company eligible for charitable status
A company can be formed as an LBG registered at Companies House and subsequently registered with the Charity Commission. To be accepted by the Charity Commission, it will need a gross income in excess of £5000 per year. If an LBG has a turnover of less than £5000, it can still apply to HMRC for charitable status for tax purposes. Whether applying to the Charity Commission or applying to HMRC for tax exemption, the following clauses will need to be entered in your Articles of Association.
- A clause stating the charitable objects of the company
- A clause stating that its income will be applied to promoting its objects
- A clause prohibiting a distribution of profits to its members and directors.
- A clause requiring all the assets that would otherwise be available to its members to be transferred on its winding up to another body with objects similar to its own
Naming your LBG
A Company intending to operate as a charity cannot include the word “charity” in its name until after it has been registered at Companies House and accepted by the Charity Commission. Once the Charity Commission has accepted the status of the company, its name can be changed.