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The overwhelming majority of commercial and non-profit companies are incorporated as ‘limited by shares’ or ‘limited by guarantee’. To help you to determine which one is best for your business, we explain the difference between the two structures and weigh up the pros and cons of limited by shares vs limited by guarantee companies.
Most companies are incorporated (registered) as limited by shares. This is an ideal choice if you want to run a commercial business, either alone or with other people, with the intention of taking some or all of the profit as personal income.
Limited by guarantee companies are typically set up by non-profit enterprises and charitable organisations. Surplus income (profit) is used to further the non-profit or charitable aims of the business, rather than being used as a source of personal income.
Whilst these two company types differ in terms of profit distribution, they both provide limited liability protection to the owners of the business. This is one of the main attractions and advantages of company formation.
What is a company limited by shares?
- A business structure that is incorporated at Companies House.
- Owned by one or more shareholders (members); managed by one or more directors.
- Exists as a distinct legal ‘person’ that is separate from its shareholders and directors. This means that a limited company is responsible for the debts of the business.
- Most popular company structure. Ideal for running a commercial business.
- Profits are usually distributed to shareholders as personal remuneration.
- Suitable for businesses of all sizes, including startups.
- Owned by one or more shareholders. To become a shareholder, you must take at least one share in the company.
- Shareholders enjoy limited liability. If the business becomes insolvent, the personal liability of shareholders is limited to the nominal value of their shares. The company itself is responsible for all debts and liabilities beyond this share capital.
- Profits are issued to members in the form of ‘dividends’.
- Members appoint directors to manage the company on their behalf. In most cases, shareholders appoint themselves as directors.
Why would I set up a limited by shares company?
- To run a profit-making business that provides a source of personal income. Suitable for new businesses and existing sole traders.
- To protect your personal finances. You will enjoy limited liability for business debts, rather than being personally liable for all debts.
- Running a business as a limited company is one of the easiest and most effective ways to boost your professional status and present your business as a credible, established, and trustworthy entity.
- Many incorporated firms are only prepared to do business with other limited companies, so this type of structure will open more doors and enable you to compete on a level playing field.
What is a limited by guarantee company?
- A business structure that is incorporated at Companies House.
- Controlled by one or more guarantors (members); managed by one or more directors.
- Exists as a legal ‘person’ that is separate from its guarantors (members) and directors and is responsible for its own debts.
- Does not have shares or shareholders. Instead, it is controlled by one or more guarantors (members).
- To become a guarantor, you must guarantee a fixed sum of money to the company. This is the extent of a guarantor’s personal liability to the business and it must be paid if the company becomes insolvent.
- Guarantors appoint directors to manage day-to-day activities. In most limited by guarantee companies, guarantors appoint themselves as directors.
Why would I set up a limited by guarantee company?
- To run a social enterprise – i.e., a non-profit organisation or charity.
- To generate income for purely non-profit or charitable purposes instead of personal gain.
- To provide limited liability to the members who control the social enterprise.
- To create a credible and established image for your non-profit or charitable organisation. A limited company is viewed as more trustworthy and legitimate than an unincorporated business. This is because of enhanced reporting and disclosure requirements.
Limited by Shares vs Limited by Guarantee – which one will you choose?
In the first instance, the most straightforward and logical approach is to choose a company structure based on your planned distribution of profits:
- Profit-making business = set up a company limited by shares.
- Non-profit business = set up a company limited by guarantee.
If your decision is not so straightforward, please speak to an accountant or professional business adviser for expert help and guidance.
Can I change a limited by shares company to a limited by guarantee company?
Unfortunately, you cannot change the limited liability of an existing company from ‘guarantee’ to ‘shares’. This type of re-registration is only available for converting a company limited by shares to an unlimited company (or vice versa) or a private limited company to a public limited company (and vice versa).
If you wish to change your company’s structure, you will have to incorporate an entirely new company and you will still be required to meet all filing and reporting obligations for your existing company until it has been dissolved. The company dissolution process can take around three months to complete.
There is also the issue of the company name. If you wish to use the same name for your new limited by shares company, you will have to wait until the dissolution has been finalised before registering the name as a limited by shares company.
Alternatively, you can change the name of your limited by guarantee company, register your new company as soon as the name-change has been approved, and then start the dissolution process for your limited by guarantee company. This may be somewhat burdensome, but it’s probably the best way to ensure that your original company name is available to register.
Register a company online in 3 hours
When you are ready to set up your limited by shares or limited by guarantee company, you will need to complete an application for Companies House. You can do this online through Rapid Formations. Simply choose a company name, select one of our company formation packages and any required address services, and complete the online application form. We will carry out a submission review and send it to Companies House for approval. Within 3-6 business hours, your application should be approved and your new company will be ready to start trading.