Company Formation

Why form a Company Limited by Guarantee?

Guarantee companies are useful for non-profit organisations that require corporate status. This means that its profits are not distributed to its members but are retained to be used for the purposes of the guarantee company. Of course this does not mean that the guarantee company cannot make a profit, as indeed it is almost paramount that it can and does so. Where an organisation is likely to enter into contracts it may need the benefit of limited liability to protect its Board of Trustees and its members, who may be involved on a voluntary basis. The following are examples of these contracts

· Employment contracts

· Purchasing land, buildings or property

· Contracting with service or product providers

· Contracts with fund raisers

A guarantee company provides a clear legal identity. This provides the ability for the company to own property in its own name and a democratic structure where its participants are required to adhere to the strict laws and regulations governing limited companies generally.

What are the differences between a company that is limited by guarantee and a company that is limited by shares?

A guarantee company does not have shares. The members of the company do not own the company but are the decision makers for the company. This means that the profits of the company cannot be distributed to the members through dividends and that they do not have any claim upon the assets of the company. The members of the company may appoint Directors often called 'Trustees', who are given the responsibility for creating and implementing policies for the company. The Directors also enjoy limited liability, provided that they have not acted negligently, or fraudulently, and have not allowed the guarantee company to continue trading when it was insolvent (this is known as "wrongful trading"). 

What is the constitution of the company? 

The constitution of the company limited by guarantee is the Memorandum & Articles of Association. The Memorandum sets out the objects of the company and the powers of the company may be exercised to meet these objects. At this point it is important to understand whether the company is to operate as a registered charity or not. If the company intends to register as a charity then the Memorandum must be acceptable to the Charity Commission. The Memorandum will also state how much money the members of the company will guarantee to pay in the event of the company being wound up.

The Articles of Association state when meetings of the company will be held and proceedings of the meetings. They also state the voting rights of members, number of trustees and the powers of the trustees. The Articles also include the procedures for appointing and retirement of members and trustees. This is a brief overview to provide an understanding of the constitution of the company.

If you are unsure which type of Memorandum & Articles of Association would be most suitable for your company please contact us to discuss your situation. It is important that you have the correct type for your needs as it may affect application for charitable status and regulations relating to payment of the members. 

What are objects?

The objects set out what a company limited by guarantee (charity) is set up to do. They should therefore be described clearly and unambiguously in the governing document, using words with a commonly accepted meaning. A charity may have more than one object.

It is important to remember that if you intend to register as a charity:

· all of the objects must be charitable, because if any aspect of them is not, the organisation cannot be accepted as a charity because it will not be exclusively charitable;

· the objects should reflect what the organisation intends to do; and

· the objects should be understandable.

Tailoring your company's objects carefully will also assist you in obtaining funding from other associations or government bodies as they will be able to clearly see your intended objects in the constitution.

Describing beneficiaries of the company's objects

If the organisation is to benefit a particular section of the public rather than the public as a whole, it is recommended that you make it clear in the objects clause. Similarly if the organisation is not going to benefit individuals we suggest that this is made clear.

If the benefits of the organisation are to be confined to a particular geographical area, again it is recommended you mention that area in the objects clause. A local government area (county, district, parish etc) is usually the clearest and simplest to adopt.

If you wish to benefit a particular ethnic group, you will need to take care with the wording of the objects. For example, the effect of the Race Relations Act 1976 on the objects of charities is to discount words relating to colour from the wording. So a charity that has objects to advance education amongst black women would in effect be a charity to advance education amongst women generally. Although the beneficial class in the objects cannot be defined by reference to colour, it can be defined by reference to race, nationality, ethnic or national origin, or other criteria other than colour. The Race Relations Act 1976 does not affect the name of the charity.

Payment of Trustees (Directors)

If you are forming a company limited by guarantee but do not intend to register as a charity then we can form the company using memorandum and articles of association that permit payment to Trustees for acting as trustees.

If you intend to register as a charity then the Charity Commission has strict guidelines regarding payment of Trustees. In most cases it is not recommended to allow payment for acting as a Trustee as this is seen as a conflict of interest.

The law states that trustees cannot receive any benefit from their charity in return for any service they provide to it unless they have express legal authority to do so. "Benefit" includes any property, goods, or services which have a monetary value, as well as money. This legal authority will come either:

· from a clause in the charity's governing document; or

· where there is no adequate clause in the governing document, from the Charity Commission or the Court.

The rule that a trustee cannot receive any benefit from his or her charity trust without explicit authorisation is based on the principle that trustees should not be subject to any conflict between their duties to their charity trust and their personal interests, unless the possibility of personal benefit which gives rise to that conflict is transparent. Transparency is achieved by requiring explicit authorisation of the benefit, and by ensuring any potential conflict of interest is properly and openly managed.

The principle does not apply to reimbursement of reasonable out-of-pocket expenses for trustees - see the next paragraph.

The concept of unpaid trusteeship has been one of the defining characteristics of the charitable sector, contributing greatly to public confidence in charities. However, there may be circumstances in which it is in the interests of a charity for one or more of the trustees to be paid. If this is to happen, trustees will first need to consider whether or not the governing document of the charity contains a power to pay trustees.

We recommend you consult the Charity Commission if you are unsure about any aspect of remunerating Trustees.

Paying Expenses for Trustees

Expenses are not payments in return for services. There can often be confusion over this. Expenses are refunds by a charity of payments which a trustee has needed to meet personally (or which have been met on his or her behalf) in order to carry out trustee duties. Even in the absence of any specific authority in the governing document, the law clearly entitles a trustee to reimbursement of expenses that have been properly incurred.

As a general rule, claims for expenses should be supported by bills or receipts from third parties, except where it is unreasonable to expect this (e.g. where small amounts are claimed). Any costs that are reasonably necessary to allow trustees to carry out their duties can be classed as expenses, and repaid to them or met directly by the charity.

The following are examples of legitimate expenses:

· the reasonable cost of travelling to and from trustee meetings, and on trustee business (including taxi fares where necessarily incurred, and petrol allowances permitted by the Inland Revenue before tax becomes payable);

· the reasonable cost of childcare whilst attending trustee meetings;

· the cost of postage and telephone calls on charity business;

· communication support: translating documents into Braille for a blind trustee, or into different languages; provision of alerting and listening devices, and other special aids for people with hearing impairment;

· providing special transport, equipment or facilities for a trustee with a disability; and

· reasonable overnight accommodation and subsistence while attending trustee meetings or other essential events (e.g. specialist or voluntary sector conferences).

The following are examples of items which are not legitimate expenses, but rather trustee payments requiring explicit authority:

· loss of earnings whilst carrying out trustee business;

· allowances, e.g. financial loss allowance;

· honoraria (small or token sums not intended to reflect the true value of the service provided);

· payment for specialist skills and services.