Understanding the Differences: Companies Limited by Shares vs. Companies Limited by Guarantee

Navigating through the various business structures can be complex, and among the myriad options available, companies limited by shares and companies limited by guarantee stand out as two distinctive choices. Both structures offer limited liability to their members but operate under different principles and serve divergent purposes. This article delves into the fundamental differences between these two types of companies, helping you understand which might be the best fit for your organisation.

Companies Limited by Shares

A company limited by shares is the most common form of company structure, particularly for businesses looking to make a profit. In this setup, the company has shareholders who own shares in the business, and their liability is limited to the amount unpaid on their shares.

Characteristics

• Profit Distribution: Any profits generated by the company are typically distributed to the shareholders in the form of dividends.
• Capital Raising: These companies can raise capital through the sale of shares.
• Ownership: Ownership of the company can be easily transferred through the buying and selling of shares.
• Management: Shareholders may have a say in the company’s management, depending on their level of shareholding.

This type of company is suitable for businesses aiming to make a profit and potentially expand or go public in the future.

Companies Limited by Guarantee

A company limited by guarantee does not have shareholders or shares. Instead, it has members who act as guarantors. The members’ liability is limited to a predetermined amount that they agree to contribute in the event of the company’s dissolution.

Characteristics

• Non-Profit Focus: These companies are typically not-for-profit or charitable organisations.
• Profit Distribution: Any profits made are usually reinvested back into the company to further its objectives.
• Ownership and Control: Ownership and control may be vested in the members, though this can vary widely depending on the company’s constitution.
• Transparency and Accountability: Companies limited by guarantee often operate under higher levels of transparency and accountability, particularly if they are registered charities.

This type of company is typically suited to Charities, clubs, community projects, and other not-for-profit entities.

What are the Key Differences?

Purpose and Profit Distribution

Limited by Shares: Aimed at profit-making and distribution to shareholders.

Limited by Guarantee: Generally not-for-profit, with any surplus funds reinvested.

Ownership Structure

Limited by Shares: Ownership is based on shareholding.

Limited by Guarantee: Ownership and control rests with the members, who are guarantors rather than shareholders.

Liability

Limited by Shares: Liability is limited to the unpaid amount on shares.

Limited by Guarantee: Liability is limited to the amount members agree to contribute upon dissolution.

Capital Raising

Limited by Shares: Can raise capital through the sale of shares.

Limited by Guarantee: Does not raise capital through share sales; funding typically comes from grants, donations, or membership fees.

Choosing between a company limited by shares and a company limited by guarantee depends largely on the purpose of your organisation and how you intend to manage profits. For-profit entities aiming for growth and shareholder return may find the limited by shares structure more advantageous, while not-for-profit organisations dedicated to social, charitable, or community-focused objectives may lean towards the limited by guarantee model. Understanding the core differences between these two structures is crucial for making an informed decision that aligns with your organisation’s goals and values.