A company limited by guarantee refers to a form of incorporated business structure of a company. These are public companies where the members’ liabilities are limited.
The term ‘limited by guarantee’ refers to the winding up of the company. The members of the company agree to contribute funds to the assets of the company. This amount is usually between $10-$100. If the business is wound up and they are unable to pay their debts, then the liability of the members will be limited to the amount of their previous guarantee.
This form of business structure makes the company a separate legal entity, which gives it the right to enter into agreements and own property.
A company limited by guarantee is unable to issue shares, meaning it is hard to raise large amounts of equity. This means that this model is not used by many commercial or revenue raising companies and is a more common business structure for not-for-profit organisations or community centres/clubs.
Furthermore, profits of the business are not sent as dividends to members, rather they are reinvested into the company to try achieve the company objectives.
A company limited by guarantee is subject to the Corporations Act 2001 (Cth) and is regulated by the Australian Securities and Investments Commission.
Small Company Limited by Guarantee
A small company limited by guarantee is one that:
- Is limited by guarantee for a full financial year,
- Is not a recipient of a deductible gift throughout the financial year, and
- The revenue for the financial year is less than $250,000
The requirements of operating as a small company limited by guarantee include:
- Preparing financial reports and Directors’ report and having them audited
- Informing members of these reports
Company Limited by Guarantee
There are two different categories under this term, and the distinguishing factor is the revenue of the company; revenue less than $1M but more than $250,000, or revenue more than $1M.
The reporting duties of these forms of companies are very similar. Both require the reporting of annual financial reports, as well as Directors’ report that follows the specific disclosure set out in Section 300B of the Corporations Act 2001 (Cth).
Member’s Rights and Companies General Obligations
Members of this type of company have the right to access a financial report and director’s report and have access to the company’s register of members, constitution and meeting minutes.
The company is obligated to hold meetings as required by the Corporations Act, keep records of member’s resolutions and meetings and make available their financial and director’s report.
Benefits of choosing this business structure
The legal form of this organisation can allow it to operate on a larger scale and its strict legal requirements can provide assurance to clients, business partners and potential donors that the company will operate in accordance with specific standards and principles.
To Sum up
Choosing the structure of your business largely depends on the type and size of your business.
If you want more information about other types of business structures, you can view this article about business structures.
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Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
Ryan works with OpenLegal as paralegal. His main legal interests are Corporate, Property and Employment Law.
