Charities – setting up a “Company Limited by Guarantee” explained

When setting up or restructuring as a charity or not for profit organisation (NFP) you will need to consider which legal structure is right for you. There are a number of different legal structures for charities and the main ones are listed below:

• Charitable company
• Charitable incorporated organisation (CIO)
• Charitable trust
• Unincorporated charitable association

The most commonly adopted legal structure for charities and NFP’s is the charitable company structure, formally referred to as a private company limited by guarantee, adopted by the likes of Macmillan, Cancer Research UK and the British Heat Foundation. Essentially, a charitable company acts as the legal wrapper around a charity and this articles provides key insight and guides you through the steps to take in order to set up a company limited by guarantee. Whilst this is a relatively straightforward process there are pitfalls to be aware of, where you may need legal advice.

Firstly, what is a private limited company?

A private limited company is a legal entity, owned by its ‘members’ whose liability is limited to the money they initially invest in the business. 

What are the key features of a company “limited by guarantee”?

A company limited by guarantee does not have shareholders or a share capital, instead ownership and control rests with its members who are guarantors up to a ‘guaranteed amount’. As there are no shareholders there is also no need to transfer shares every time a membership is transferred. This type of structure is facilitative of not for profit status because typically profits are not distributed to its members, instead profits are reinvested back into the business for its charitable purpose. 

The ‘guaranteed amount’ is the agreed amount of money the guarantors (or subscribers) promise to pay the company if it is unable to pay its debts. The guarantors must pay the company the full amount of their guarantee and this payment covers the guarantors for situations such as the company being closed down. The guaranteed amount is not linked to how much the company is worth - you choose how much they pay!

What are the key benefits?

The key benefits of adopting a company limited by guarantee structure are as follows:

• The company can enter into contracts, employ staff and own assets (amongst other things) in its own name. 
• The members can set low limits on their personal liability.
• The company is responsible for its own finances: This means members are not responsible for company debts. 
• The company has to act in line with its own internal rules which are set out in  its  ‘articles of association’.

How to set up a company limited by guarantee?

You can apply to set up a company limited by guarantee:

(a) Online at Companies House; 

(b) Online through an Incorporation Agency; or

(c) By post at Companies House.

Apply online through Companies House

It usually takes between 24 - 48 hours for your application to be processed. The application fee is £50. 

Using this method:

• Your company can only use the model articles which may not be appropriate for your needs.
• Your company may have a maximum of 5 officers (directors and secretaries). You can appoint more in the future, if required.
• You cannot apply online if: 

o A parent company will control the new company.

o The new company will be taking over another charity.

o Any of the subscribing members will be a ‘corporate body’ (i.e. another limited company or a limited liability partnership).

If you have used this method of incorporation we can help you make any changes required to the model articles to meet the needs of the charity including its aims and its objectives.

Apply online through an Incorporation Agency

You can apply to set up a company limited by guarantee online via an Incorporation Agency. The fee depends on the agency and most will offer a same day service. 

Applying this way offers more flexibility when setting up because:

• You can choose bespoke articles which have been tailored to your specific requirements, to include the aims and objectives of the charity.
• You can appoint any number of officers (directors and secretaries). 
• Both individuals and corporate bodies may be subscribing members.

Apply by post to Companies House

You can submit an application by post - the fee is £71 and can take up to 14 days depending on timescales. This method offers full flexibility to incorporate a charitable company in the manner you require but most people require a more prompt incorporation.

Steps to take when setting up a company limited by guarantee 

Steps to take when setting up your company include:

• Make sure setting up a company limited by guarantee is right for you, and ensure the articles of association are appropriate for the type of company, its aims and its objectives.
• Choose a suitable company name, taking care if similar and existing charities have similar names and avoid names consisting of sensitive or restricted words. 
• Decide on a registered office address for the company but bear in mind this information will be available to the public.
• Decide on the Standard Industrial Classification (SIC) code that applies. 
• Individual directors and company secretaries must be over 16 years and lawfully able to be appointed, this means you cannot appoint an undischarged bankrupt or someone who has been otherwise disqualified and they must willingly consent to be appointed as your company director.

What happens after a company limited by guarantee is set up?

• Once the company is incorporated, the company name, address and company registration number should be clearly displayed on all official company paperwork, (including your website if you have one). 
• You must display a sign showing your company name at your registered company address and wherever your charitable company operates but if you are running it from home you do not need to display a sign. 
• Companies House will send an authentication code to the registered office after incorporation which will allow you to register for online filing. 

Important things to note

• A charitable company only obtains ‘charitable status’ once it is registered with the Charity Commission. 
• A charitable company is dual registered at Companies House and the Charity Commission, and therefore you must comply with dual filing requirements.
• Each year the company must file annual accounts and a confirmation statement at Companies House, failure to comply with these filings can result in a fine or the company being struck off the register.
• The responsibilities and duties of a director are important and failure to comply with statutory duties can result in a fine and/or imprisonment. You can find more information online at gov.uk. 

Legal advice for setting up a company

If you are considering setting up a charitable company, a corporate lawyer can help you through the process. A solicitor can provide advice on the company's legal structure, prepare bespoke articles of association, and ensure your application is submitted properly. If you need other legal support in setting up your company, please do not hesitate to contact our Corporate and Commercial Team.

Call our specialist solicitors on 0808 231 1320