What are the main features of a Company Limited by Guarantee?

If your voluntary, charitable, social enterprise or community organisation has a fairly substantial turnover, employs staff, owns or occupies premises (or aspires to do these things) and you wish to limit the personal liability of management committee members then you may wish to consider registering as a Company Limited by Guarantee.

The Company Limited by Guarantee model is the type of company normally chosen by voluntary organisations, charities, social enterprises and community groups because:

• It is a democratic structure; the company is controlled by the members who elect the Management Committee, usually known as the Board of Directors
• Members cannot benefit from any profits made - see our Committeee Roles & Responsibilites Guide for further information
• Each Management Committee member's liability is limited to a nominal sum - usually not more than £1 - which he or she guarantees to pay if the company has debts on winding up

With the Company Limited by Guarantee model, the incentive for members to become involved is not profit, but commitment to the objects of the organisation.

How can I establish a Company Limited by Guarantee?

A Company Limited by Guarantee can be formed by a group of people (Steering Group) who wish to set up a new organisation, or by the committee of an existing, constituted organisation. An Organisation/ Steering group aiming to become a limited company must submit a Constitution to Companies House. For more information on constitutions see our Guide to Constitutions. The Constitution needed for Companies Limited by Guarantee consists of two parts:

• Memorandum of Association which set out the objectives of the company, the powers the company has to pursue its objects and the extent of the liability of the members should the company wind up
• Articles of Association which state the rules governing how the company is to be run, including procedures at meetings, voting procedures, accounting procedures and the method of electing the committee of management, usually referred to as the Board of Directors

SCVO publishes a Model Memorandum & Articles of Association on its website (www.scvo.org.uk) which can be adapted to meet the needs of individual groups - CVS Fife can help with the adaptation process. Most legal firms will also create Memorandum & Articles of Association for a fee. Companies House has a range of guidance booklets on forming a new company available on its website: www.companieshouse.gov.uk

Can an Organisation be a Company Limited by Guarantee and a Charity?

A Company Limited by Guarantee can become a Registered Charity provided that all its objects are charitable and there are no clauses within its memorandum & Articles of Association that do not comply with Charitable Law. The Office of the Scottish Charity Regulator (OSCR) will require you to submit a number of documents, including your Memorandum & Articles of Association, so it can assess your application for Charitable status.

Likewise, a Registered Charity can become a Company Limited by Guarantee; OSCR has a fast-track process for this if the Charity concerned does not propose to change its aims and objectives and has the power within its existing Constitution to wind up the organisation and transfer any assets over to the new company. See the OSCR website for further information: www.oscr.org.uk

Is a Company Limited by Guarantee for us?

The decision on whether or not to apply for Company Limited by Guarantee status should be made on an individual, organisation-by-organisation basis. CVS Fife's development staff members work on the basis of what is best for the individual organisation while advising on this issue.

Some of the key advantages of CLG can be:

• The personal assets of the members are not usually at risk if the company is liable for debts*
• A company undertakes all its activities in its own right
• It provides a democratic structure - the members elect the directors (Management Committee) and have the right to remove them
• The company framework is suitable for any size of organisation, so a small organisation can expand without being restricted by the structure it has adopted
• Owning and transferring property is simplified - no individuals have to be appointed as nominal owners

* It is important to remember that, while CLG does provide some protection for Committee Members/Directors, it only does so if the Board can demonstrate that it has been acting with due care and diligence. Boards that do not meet regularly, fail to scrutinise reports and/or implement financial monitoring may leave themselves open to claims of negligence which CLG status cannot protect them from.

The disadvantages of CLG can be:

• There is significant regulation associated with CLG - Directors have statutory responsibilities including filing annual returns and keeping proper accounting records
• There can be a lack of privacy for individual Directors - information on Directors and a company's activities is submitted to Companies House and is available for public scrutiny
• The initial costs can be high, potentially including:
  • A registration fee
  • Legal fees to a lawyer for assistance in establishing the company
  • A recurring fee for submitting annual returns
  • Recurring administrative costs, including auditing fees, through having to comply with the Companies Act

Where Can I Get Further Information?

Advice is available from CVS Fife. The Companies House website (www.companieshouse.gov.uk) and the OSCR website (www.oscr.org.uk) are also very useful sources of information.

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