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The vast majority of companies in the UK are limited by shares, but some organisations choose to be limited by guarantee. At some point during the life of a company, perhaps as a result of a change in direction or policy, it may be preferable to operate under the alternative setup.
But can you convert a limited by guarantee company to one that is limited by shares (or vice-versa)? We explore this below, after first discussing the main differences between these two company structures.
What is the difference between a company limited by shares and a company limited by guarantee?
When forming a new company, the default option is a private company limited by shares. But it’s also possible to incorporate a company limited by guarantee. The main differences are as follows:
Companies limited by shares
Limited by shares companies are generally set up with the intention of being profit-making businesses. They are considered to have their own legal personality (i.e., legally separate from the people who run them, with their own finances) and crucially they:
- Have shares and shareholders, and
- Can retain any profits they make after paying tax, paying these out to shareholders as dividends.
Companies limited by guarantee
Limited by guarantee companies are also considered to have their own legal personality, but they are normally set up as charitable enterprises or ‘not for profit’ outfits. The important distinction is that they:
- Have guarantors and a ‘guaranteed amount’ – as opposed to shares and shareholders, and
- Invest any profits they generate back into the company – as opposed to distributing these as dividend payments etc.
Essentially, when a business is being formed primarily with charitable endeavours in mind, rather than the aim of making profits for owners, this is when it should be registered as a company limited by guarantee.
Certain charitable funding bodies will only invest in companies limited by guarantee. But for the majority of businesses, profit will be a motive, and therefore a company limited by shares will be the structure of choice.
Why would I want to convert a limited by guarantee company to one limited by shares?
Section 5 of the Companies Act 2006 states that a clear distinction must be made between companies limited by guarantee and those with shares: “A company cannot be formed as, or become, a company limited by guarantee with a share capital.” Therefore a clear choice must be made from the outset as to whether a business is intended to be a non-profit making venture or a regular profit making enterprise.
But circumstances can change over time, and a business structure can impede progress if a change of direction comes about. For example, a company which is set up principally as a charity may lose a crucial source of funding (e.g. from a local authority) which renders the business not viable.
In this case, it may be necessary to secure new funding from investors who expect dividends. But dividends cannot be paid out in companies limited by guarantee – only in companies limited by shares. In this scenario, it may be necessary to shift from a company structure limited by guarantee to one with shares.
Can I convert a limited by guarantee company to a limited by shares company?
There is no specific legal process under the Companies Act 2006 which enables a limited by guarantee company to be converted to a limited by shares company.
However, the same outcome can be achieved by: setting up a new limited by shares company, transferring the assets across and closing the limited by guarantee company. The steps are as follows:
1. Incorporate a new company limited by shares
Registering a new limited by shares company is straightforward and can be done in a matter of hours using a company formation agent such as Rapid Formations. As well as registering a new company, it will be necessary to register with HMRC for purposes of corporation tax – and potentially for PAYE, self assessment and VAT.
Although choosing a company name is normally an important consideration, if you wish to use the same name, a placeholder name can be chosen during the incorporation process and changed later on, after the company limited by guarantee has been closed.
2. Transfer across assets
It will normally be necessary to transfer any assets across from the company limited by guarantee to the new company limited by shares. Assets may include money, goods, real estate and intellectual property.
There are various ways of transferring assets between companies, but the process can attract certain forms of taxation, so it is a good idea to seek advice from a lawyer and/or accountant on the optimal method for your particular circumstances.
3. Close old company limited by guarantee
It is possible to close the company limited by guarantee through a process known as voluntary strike off. This essentially removes the company from the register of companies, which is maintained by Companies House. Voluntary strike off is permitted under section 1003 of the Companies Act 2006.
To meet the criteria for voluntary strike off, a company must not:
- have traded or sold off any stock in the last 3 months
- have changed names in the last 3 months
- be threatened with liquidation, or
- have any agreements with creditors (e.g. a Company Voluntary Arrangement)
If it meets these criteria, a company can proceed with closing down the business by ensuring that: tax and debt liabilities have been dealt with; employees have been moved across to the new company (and HMRC have been informed that the old company is no longer an employer); final accounts have been submitted to HMRC; and the final tax return has been submitted to HMRC and Companies House.
Once the company has effectively concluded its business affairs, it can proceed with voluntary strike off by filling in and submitting form DS01. This form must be signed by a majority of company directors. A copy of the application to strike off the company must be sent within 7 days to anyone who could be affected, including:
- managers or trustees of any employee pension fund, and
- any directors who didn’t sign the application form
Assuming the form has been correctly filed, the request for the company to be struck off will be published as a notice in the local Gazette and, after two months and if no one objects, the company will be officially struck off the register. A second notice will then be published in the Gazette to confirm that the company has been dissolved.
4. Change name of new company
The name of the new company limited by shares can only change its name to the former name used by the company limited by guarantee once the old company has been struck off the register of companies.
To change its name, a special resolution must be passed by the directors, and then form NM01 should be filled in or submitted online. It is also possible to change a name if permission is given to do so in the articles of association, but in this case form NM04 must be used (and it cannot be submitted online – only by post).
Please note: Before an official change of name has taken place, it is possible to use a business name (i.e. if the old company used a business name, the new company can use the same business name immediately).
Can I run both companies at the same time?
If keeping the same company name is not necessary or important, it may be easier to set up a new company limited by shares, and leave the old company limited by guarantee on the register. Assets can still be transferred across, but in this case there will be no need to undertake the procedure of voluntary strike off. The downside of running two companies is the extra administration involved.
It is possible to make the old company dormant, which can reduce admin. A dormant company is one that’s not carrying out any business activity or receiving an income – making it inactive for Corporation Tax purposes as far as HMRC is concerned. Small dormant companies can claim exemption from audit or filing full accounts under section 480 of the Companies Act 2006.
Can I create a group of companies?
Another alternative to closing the old company limited by guarantee is to leave it open and set up a new company limited by shares, and then to create a group structure, e.g. by creating a holding company, which would effectively be the parent company for both the new and old company.
One advantage of this method is that assets can generally be moved between the old company and the new company in a group structure, without incurring capital gains.
Holding companies can be set up in the same way as any other limited company is formed. However, it must have control over at least one subsidiary company to be classified as a holding company under the Companies Act 2006.