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Pankaj Tyagi
| Updated: 29 Mar, 2022 | Category: Company Registration

Company Limited by Guarantee: Meaning, Benefits, and Provisions

Company Limited by Guarantee
Reading Time: 4 minutes

According to Section 2(21) of the Companies Act 2013, the company limited by guarantee refers to a type of company in which members are bound to contribute a nominal amount as cited in the MOA in case of the company’s wind up. It is a kind of company structure widely preferred by companies with charitable objectives. In this write-up, we will talk about this specific company type in detail and talk about its benefits and underlying provisions.

Meaning of company limited by guarantee

  • Company limited by guarantee is also known as Guarantee Company. In a layman’s term, it refers to a company lacking shareholder but owned by a member known as guarantors who assures to pay a nominal amount in the case of wound up. It is a specific form utilized for NPOs, i.e. non-profit organizations. Under this form, profit reaped by an entity is reinvested to serve different companies’ purposes.
  • Henceforth, it is a legally productive structure for NPOs, charitable trusts, clubs and other identical establishments. An entity limited by guarantee acts as an independent legal establishment and carries a distinct legal identity.
  • It can perform undertakings in the company’s name, such as borrowing credit, employing human resources, buying and selling property, leveraging legal proceedings in case of dispute, etc. MOA (Memorandum of association) is a mandate for such companies.

Noteworthy facts pertaining to a company limited by guarantee

  1. Member will have security for being held accountable in their personal capacity for the sum borrowed for business in the company’s name.
  2. The company’s members are only entitled to pay the assured amount as cited in the company’s MOA.
  3. Members are accountable to pay only in the event of the winding-up of the company.

An overview on the types of Guarantee Company

Companies limited by guarantee or Guarantee companies are categorized into two types.

1. Company limited by guarantee with share capital

  • The company will become operational with some working funds or initial capital from its member as initial working capital is not accessible via subscriptions, grants, endowments, fees or any other sources.
  • But later, upon commencement of operation, normal working funds can be secured via the services provided in the form of charges, fees, and subscriptions.
  • The shareholding figures out voting power in the guarantee company possessing share capital.

2. Company limited by guarantee (no share capital)

  • Such a guarantee entity does not secure working funds or initial capital from its members.
  • Instead, these companies procure the capital via multiple sources such as subscriptions, grants, endowments, fees etc. Forex: NPOs or charitable institutes started by government grants or public donations.
  • Voting power in Guarantee Company lacking share capital is figured out by the guarantee.

Underlying Benefits and Key Features of Company Limited by Guarantee

  1. An entity limited by guarantees has a distinct legal identity from its owner/guarantor. The company, per se, is accountable for its debts.
  2. Guarantors are not liable for repayment against any of the company’s debts. Henceforth, their personal assets remain untouched. They are only accountable to pay out the agreed sum as per their guarantee in the case of the company’s insolvency.
  3. Any individual or corporate body can serve the role of a guarantor. It requires an individual director and an individual guarantor to get established. The same individual can serve both positions, making it convenient for any to commence a company. But, multiple guarantors and directors can also fit into this context.
  4. A company limited by guarantee is typically established for charitable causes or non-profit purposes. Any profit earned is reinvested and leveraged for advocating its non-profit activities.
  5. Entity limited by guarantee may affix the term’ limited” in its name. This word garners a sense of trust among investors and clients.

Underlying Provisions for Company Limited by Guarantee in India

  1. According to Section 37 of Companies Act, 2013, a company limited by guarantee (lacking share capital) registered on or post the 1st Apr 1914, every provision in the articles or Memorandum or in any company’s resolution purporting to vest any individual a right to claim a fair part of the sum in the company’s divisible profits otherwise than as a member shall be void.
  2. For the provisions of the said Act regarding the Memorandum of a company limited by guarantee & of this section, every provision cited in articles or Memorandum, or in any resolution, of any entity limited by guarantee and registered on or post 1st Apr 1914, purporting to bifurcate the company’s undertaking into shares or interest, shall be treated as provision relating to sharing capital, despite that the nominal amount or no. of the shares or interest is not mentioned thereby.

MOA i.e. Memorandum of Association

According to the Section 4 (6) of the Companies Act, 2013, Memorandum of Association should be in the form provided in Table B for entities limited by guarantee (lacking share capital) and in Table C for entities limited by guarantee (with a share capital)

AOA i.e. Articles of Association

As per the Section 2 (5) of the Companies Act, 2013[1], AOA must be in the form provided in Table H for companies limited by guarantee lacking share capital and Table G for entities limited by guarantee possessing share capital.

Conclusion

To conclude, guarantee companies are widely used for clubs, charities, sports associations, NGOs, membership organizations, and other social enterprises. They are generally established to facilitate services to the public with no profit generating motive.  Also, these companies provide apt protection to the guarantor’s personal assets. 

Read our Article:Types of companies under Companies Act, 2013

Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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