What is a Company Limited by Guarantee

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for people responsible for company filings and statutory records who want clear guidance on Companies House requirements without jargon. Our aim is to help you understand your obligations, avoid filing errors, and stay compliant with Companies House and HMRC.

A company limited by guarantee is one of the most misunderstood business structures in the UK. I am often asked about it by people setting up charities, clubs, property management companies, or not for profit organisations who know a standard limited company with shares does not feel quite right, but are unsure what the alternative actually means in practice.

In simple terms, a company limited by guarantee is a type of limited company that does not have shareholders or share capital. Instead, it has members who agree to contribute a small, fixed amount if the company is wound up. That single difference changes how the company is owned, how profits are treated, and how control works.

In this article, I will explain what a company limited by guarantee is, how it works under UK law, how it differs from a company limited by shares, when it is commonly used, and the practical advantages and disadvantages you need to understand. Everything here is based on UK practice and how these companies are actually used day to day.

What a company limited by guarantee actually is

A company limited by guarantee is a legal entity formed under the Companies Act. Like any limited company, it has its own legal personality. It can enter into contracts, employ staff, own assets, and be sued in its own name.

The key difference is how liability and ownership work.

Instead of shareholders who own shares, a company limited by guarantee has members. Each member agrees to guarantee a fixed amount, usually a very small sum, if the company is wound up and cannot pay its debts.

Typical guarantee amounts are:

• £1

• £10

• £100

In practice, the £1 guarantee is by far the most common.

What the guarantee actually means

The guarantee is not an ongoing payment. Members do not pay this amount during the normal life of the company.

The guarantee only becomes relevant if:

• The company is wound up

• The company cannot pay its debts

• There is a shortfall after assets are used

In that situation, each member may be required to contribute up to their guaranteed amount.

This is why it is called limited by guarantee. The liability of members is capped at the guaranteed amount.

Is a company limited by guarantee a limited company

Yes. A company limited by guarantee is still a limited company.

It is registered at Companies House and appears on the public register in the same way as a company limited by shares.

It must:

• File annual accounts

• File a confirmation statement

• Keep statutory registers

• Comply with the Companies Act

The difference is not about whether it is a company, but about how it is structured.

No shares and no shareholders

One of the defining features of a company limited by guarantee is that it does not have shares.

This means:

• There is no share capital

• There are no shareholders

• Ownership is not measured in percentages

• You cannot buy or sell ownership

Instead, control sits with the members and directors according to the company’s constitution.

This makes the structure unsuitable for businesses that want external investors or owners looking to extract value through dividends.

Members and directors explained

In a company limited by guarantee, there are two key roles.

Members are similar to shareholders in a company limited by shares. They:

• Agree to the guarantee

• Have voting rights

• Can appoint and remove directors

• Approve major decisions

Directors manage the company day to day. Their legal duties are the same as directors of any other limited company.

In small organisations, the same people are often both members and directors.

How profits are treated

A common question is whether a company limited by guarantee can make a profit.

The answer is yes. There is no rule that says these companies cannot make a surplus.

However, there is an important restriction.

Any surplus or profit must usually be:

• Reinvested into the company

• Used to further the company’s objectives

• Not distributed to members

This restriction often appears in the company’s articles of association.

Because there are no shareholders, there are no dividends.

Common uses of companies limited by guarantee

Companies limited by guarantee are most commonly used where profit distribution is not the primary goal.

Typical examples include:

• Charities

• Not for profit organisations

• Sports clubs

• Membership organisations

• Trade associations

• Residents’ management companies

• Property freehold management companies

In these cases, the structure supports collective ownership and long term purpose rather than financial return.

Companies limited by guarantee and charities

Many UK charities are set up as companies limited by guarantee.

In this situation:

• The company is registered at Companies House

• The charity is also registered with the Charity Commission

• The company structure provides limited liability

• Charity law overlays company law

This dual registration allows charities to operate professionally while maintaining strong governance.

Charity tax matters are overseen by HMRC, while charitable regulation sits with the Charity Commission.

Residents’ management companies

One of the most common commercial uses of companies limited by guarantee is in property.

Residents’ management companies are often set up as companies limited by guarantee to manage:

• Freehold buildings

• Communal areas

• Service charges

Each flat owner becomes a member. There are no shares to transfer when a flat is sold. Membership is usually transferred automatically.

This avoids the complexity of share transfers and keeps ownership aligned with occupation.

How a company limited by guarantee is formed

The formation process is similar to forming any other limited company.

You must:

• Choose a company name

• Decide on a registered office

• Appoint at least one director

• Decide who the members are

• Set the guarantee amount

• Adopt articles of association

The articles are particularly important because they set out how the company operates and how surplus funds are treated.

Articles of association and importance

For companies limited by guarantee, the articles of association do much more than just formalise procedures.

They often include:

• The company’s purpose

• Restrictions on profit distribution

• Membership rules

• Voting rights

• Winding up provisions

Poorly drafted articles are one of the most common sources of dispute in these companies.

Tax treatment of companies limited by guarantee

From a tax perspective, a company limited by guarantee is not automatically tax exempt.

It is taxed like any other company unless it qualifies for specific exemptions.

This means:

• Corporation Tax may apply

• VAT may apply

• PAYE obligations apply if staff are employed

If the company is a registered charity, tax reliefs may apply, but these depend on compliance with charity law.

Tax is overseen by HMRC in the same way as for other companies.

Can a company limited by guarantee pay salaries

Yes. These companies can employ staff and pay salaries.

They can also pay directors for work done, provided this is allowed under the articles and complies with relevant rules, particularly for charities.

What they generally cannot do is distribute profits to members.

How control works in practice

Control in a company limited by guarantee sits with the members collectively.

Members typically:

• Vote at general meetings

• Approve major changes

• Appoint or remove directors

This democratic structure is one of the reasons the model is popular for clubs and associations.

However, it can also slow decision making if membership is large or disengaged.

Advantages of a company limited by guarantee

From my experience, the main advantages include:

• Limited liability for members

• No need for share capital

• Clear separation from personal finances

• Suitable for not for profit aims

• Credible legal structure

For many organisations, these benefits outweigh the lack of ownership flexibility.

Disadvantages and limitations

There are also important limitations to understand.

These include:

• No equity ownership

• No dividends

• Less attractive for investors

• Potential governance complexity

• Ongoing compliance requirements

This structure is not suitable where raising investment or selling ownership is a priority.

Company limited by guarantee versus company limited by shares

The choice between these two structures depends on purpose.

A company limited by shares is usually better where:

• Owners want to extract profits

• External investment is planned

• Ownership percentages matter

A company limited by guarantee is usually better where:

• Profit is not the primary aim

• Membership is collective

• Long term stewardship matters

Choosing the wrong structure can be difficult and costly to fix later.

Director duties and responsibilities

Directors of companies limited by guarantee have the same legal duties as any other company director.

These include duties to:

• Act in the best interests of the company

• Avoid conflicts of interest

• Exercise reasonable care and skill

• Comply with the Companies Act

Limited liability does not remove responsibility for misconduct or breach of duty.

What happens if the company is wound up

If a company limited by guarantee is wound up, assets are used to pay creditors.

If there is a shortfall, members may be asked to contribute up to their guaranteed amount.

Any remaining assets are usually transferred to another organisation with similar objectives, especially in charities and not for profit bodies.

Members do not receive distributions.

Common misconceptions

The most common misconceptions I encounter include:

• Thinking these companies cannot make money

• Assuming they are automatically charities

• Believing members have no responsibilities

• Confusing guarantee with a subscription fee

Understanding the structure properly avoids these misunderstandings.

When a company limited by guarantee makes sense

In my experience, this structure works best when:

• There is a shared purpose

• Profit distribution is not the goal

• Long term continuity matters

• Ownership should not be transferable

It is a practical and respected structure when used for the right reasons.

Final thoughts

A company limited by guarantee is a powerful and flexible structure when profit extraction and ownership are not the priority. It provides limited liability, legal credibility, and a framework for collective purpose.

However, it is not a halfway house between a club and a business. It is a full limited company with real responsibilities, ongoing compliance, and director duties.

In my experience, organisations that thrive under this structure are those that understand it from the outset and choose it deliberately, not by default. When the structure matches the purpose, a company limited by guarantee can operate smoothly, transparently, and sustainably for many years.

You may also find our guidance on articles of association in company law and what is a private limited company helpful when dealing with related Companies House tasks. For a broader overview of filings, registers, and statutory duties, you can visit our companies house hub.