Company Limited by Guarantee, Definition and Features, Formation, Types

Company Limited by Guarantee is defined under the Companies Act, 2013 in Section 2(21) as a company in which the liability of its members is limited by the company’s memorandum of association to such an amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.

In simpler terms, the members of the company do not have shares, but they agree to pay a specific sum (called a “guarantee”) if the company is liquidated. The amount of this guarantee is specified in the memorandum of association and represents the member’s maximum financial responsibility.

Features of a Company Limited by Guarantee:

1. No Share Capital

Company Limited by Guarantee typically does not have share capital, meaning it does not issue shares to its members. Instead, it functions on the basis of members’ guarantees. However, in some cases, a company limited by guarantee may also have a share capital, but this is less common.

2. Liability of Members Limited to Guarantee

The most important feature of a company limited by guarantee is that the liability of the members is limited to the amount they have agreed to guarantee. This means that members are not personally liable for the company’s debts beyond the amount specified in their guarantee. This feature provides financial protection to the members, similar to the concept of limited liability in other types of companies.

3. Non-Profit Objective

Most companies limited by guarantee are non-profit organizations. They are typically established for charitable, educational, cultural, or social purposes. Any surplus profits generated are generally reinvested into the company to further its objectives, rather than being distributed to members as dividends.

4. No Dividends

Since the company is generally established for non-profit purposes, members do not receive dividends. The company’s income is used to achieve its stated objectives, such as funding charitable projects or educational initiatives.

5. Separate Legal Entity

Like other types of companies, a Company Limited by Guarantee is a separate legal entity from its members. This means that the company can enter into contracts, own property, sue, and be sued in its own name. This separation also ensures the perpetual existence of the company, which continues even if the members or directors change.

6. No Ownership by Members

In a Company Limited by Guarantee, the members do not “own” the company as shareholders do in a company limited by shares. Instead, the members are simply guarantors who contribute financially if the company is wound up. This structure is ideal for organizations that prioritize their mission or purpose over generating profit for owners.

7. Control by Members

Members of a Company Limited by Guarantee have the power to elect directors, who are responsible for managing the company’s operations. Members also have a say in important decisions, such as changes to the company’s constitution, by voting at general meetings. However, their control is not based on shareholding but on their role as guarantors.

8. Flexible Governance Structure

The governance structure of a Company Limited by Guarantee is flexible, allowing it to be tailored to the organization’s needs. The Memorandum of Association (MOA) and Articles of Association (AOA) define the rules for managing the company, the role of members and directors, and the company’s objectives. This flexibility makes it suitable for a wide range of non-profit and charitable activities.

9. Filing and Compliance Requirements

A Company Limited by Guarantee must comply with the provisions of the Companies Act, 2013, including filing annual returns, holding meetings, and maintaining proper financial records. These companies are subject to the same legal requirements as other companies, ensuring transparency and accountability in their operations.

Formation of a Company Limited by Guarantee:

The process for forming a Company Limited by Guarantee is similar to that of any other company under the Companies Act, 2013, but with certain unique considerations due to its non-profit nature.

1. Minimum Number of Members and Directors

A Company Limited by Guarantee requires:

• A minimum of two members (for private companies) or seven members (for public companies).
• A minimum of two directors (for private companies) or three directors (for public companies).
• Members must agree to the amount they will guarantee in the event of the company’s winding up.

2. Memorandum of Association (MOA) and Articles of Association (AOA)

The company’s Memorandum of Association (MOA) must specify the amount of the guarantee each member agrees to contribute. The MOA also outlines the company’s objectives, particularly its non-profit nature, if applicable. The Articles of Association (AOA) set out the rules governing the company’s internal management, such as how directors are appointed, how meetings are conducted, and how decisions are made.

3. Application for Name Approval

The promoters of the company must apply for name approval with the Registrar of Companies (ROC). The proposed name must comply with the naming guidelines under the Companies Act and must not be similar to any existing company’s name. The name should reflect the company’s non-profit or guarantee-based structure, often ending with the words “Limited by Guarantee.”

4. Filing Incorporation Documents

After the name is approved, the incorporation documents must be filed with the ROC, including:

• Form SPICe+ (Simplified Proforma for Incorporating a Company Electronically).
• The MOA and AOA, outlining the company’s objectives, rules, and member responsibilities.
• Details of members and directors.
• The address of the company’s registered office.
• Payment of the required fees.

5. Obtaining the Certificate of Incorporation

Upon verification of the documents, the Registrar of Companies will issue a Certificate of Incorporation, which officially establishes the company as a legal entity. The certificate includes the company’s Corporate Identification Number (CIN) and the date of incorporation.

6. Commencement of Business

Before starting business activities, the company must meet any additional compliance requirements, such as opening a bank account, filing the necessary declarations with the ROC, and registering with relevant authorities if it is a charitable organization (e.g., obtaining tax exemptions under Section 80G of the Income Tax Act).

7. Compliance and Ongoing Obligations

Once incorporated, the company must maintain proper records and comply with legal obligations, including:

• Holding annual general meetings (AGMs).
• Filing annual returns and financial statements.
• Adhering to audit requirements.
• Ensuring that the company’s activities are in line with the objectives outlined in the MOA, especially if it operates as a non-profit organization.

Types of Company Limited by Guarantee

1. Company limited by Guarantee having Share capital

Company will be set in motion with some initial capital or working funds from its members as initial working capital is not available through grants, subscriptions, fees, endowments or any other sources. But later, once the operation is started, normal working funds can be received from the services rendered in the form of fees, charges and subscriptions. Voting power in guarantee company having share capital is determined by the shareholding.

2. Company limited by Guarantee not having Share capital

Such type of guarantee companies do not obtain initial capital or working funds from its members. Instead, the company raise the working funds through various other sources like endowments, grants, subscriptions and fees etc. For example, non-profit companies or charitable institutes started by public donations or government grants. Voting power in guarantee company not having share capital is determined by the guarantee.