The New types of Limited Companies
Companies Limited by Guarantee (CLG) are an alternative form of company entity to the usual one with share capital, the difference being that its owners are guarantors (members) rather than shareholders. Whilst this new type of company was allowed from 2006, it is only relatively recently that the reporting requirements have been decided on to make them a practical reality.
The only companies that must be CLG are charities and Community Interest Companies, but other entities such as non-profit-making companies, sports associations (e.g. the England and Wales Cricket Board), clubs, membership organisations and residential property management companies can all be CLG’s but are not legally required to be so.
What is brand new are the Charitable Incorporated Organisations (CIO), which are are a new form of limited company with reduced regulatory requirements, but which are not classified as CLG’s. ( If any reader wants more information on this special type of company,please email me).
The main difference between CLG’s and companies limited by shares are:
The incentive for members to become involved is a commitment to the company’s objectives rather than profit as with shareholder companies.
CLG companies cannot be incorporated with share capital (s5 Companies Act 2006) which makes this type of company less likely to become insolvent.
Members guarantee that they will contribute a nominal amount should the company be wound up either whilst they are members or within one year of them ceasing to be so. The Model Articles for CLG state that this amount be £1.
CLG companies have different Articles and Memoranda of Association. The CLG Model Articles contains one Article rarely seen in share companies – article 4 gives members the power to ‘direct the directors to take, or refrain from taking, specified action’.
The Advantages of a CLG:
- The personal assets of the members are not held liable if the company becomes insolvent. However, such protection is only available if the Management Committee/Trustees/Board can demonstrate that it has acted with ‘due care and diligence’ to ensure that they do not leave themselves open to claims of negligence. This means meeting on a regular basis, preparing and scrutinising financial reports, submitting accounts and returns to HMRC and Companies House as required. The directors of the company will only incur personal liability if they have been guilty of some wrongdoing (e.g. wrongful or fraudulent trading).
- Provides a democratic structure – the members elect the board and have the right to remove them.
- CLG’s are suitable for any size of organisation enabling a small organisation to expand without restriction.
- A defined set of objectives as per the constitution may make it easier to ensure that money is spent according to a donor’s wishes.
- A legal entity in its own right, contracts are undertaken in the name of the company thereby protecting the liability of the individual members, who may only be involved voluntarily. Such contracts include the usual employment contracts, contracts for the purchase of goods as well as for the purchase of property.
- No requirement to issue member certificates.
- There can be different classes of member reflecting different classes of rights (e.g. non-voting members or members who have restricted voting rights).
The Disadvantages of a CLG:
- Statutory requirements of submission to HMRC and Companies House are the same as for companies limited by shares. Hence similar costs incurred for the keeping of proper accounting records, filing of annual returns etcetera.
- Lack of privacy for individual board members as personal details submitted to Companies House are available to the public as with a company limited by shares; members details are not recorded.
- CLG cannot raise finance by the issue of shares.
Company administration matters:
- CLG members are required to comply with the same legal rules and requirements as other limited companies (e.g. at least one director, submit an Annual Return and Accounts to Companies House).
- Subject to the same rules for winding up of the company (i.e. can be compulsory liquidated).
- Companies House list director’s names in the same format as shareholders. There are no members details held at Companies House, the only public record being the Register of Members held at the company’s Registered office.
- Specialised Articles of association.
- Normally one vote per member whatever the amount of guarantee contribution. If there are differing amounts of guarantee there should be a clause in the Articles to confirm one member one vote.
- A copy of the full accounts is required to be sent to members so long as they have the members’ current address; summary statements can only be sent by companies that are not required to have an auditor’s report. This could be a large cost better spent so the Articles should be amended to state that all members are deemed to have consented to communication by email or website otherwise the specific consent of each member must be obtained.
- A CLG company need not have ‘Limited’ or ‘Ltd’ after its name if it is a charity or the company has been set up ‘for the promotion or regulation of science, education, religion, charity’ so long as ‘the income is used in the promotion of the objects’.
Distribution of profits of a CLG:
- Profits can be distributed unless prevented from doing do in the Articles. The Articles usually include a clause prohibiting distribution of surplus profits, rather to reinvest, such that all profits are applied to the purpose for which the company was established.
- Payments to board members can be made as remuneration or repayment of expenses.
- If the CLG is a charity the Charity Commission has strict guidelines regarding payment to board members.
- Members do not have claim upon the company’s assets.
Accounts and tax position of a CLG:
- The accounting, tax treatment and filing deadline rules are exactly the same as for a company limited by shares (e.g. Corporation Tax return and Accounts to HMRC, with CT being charged on any profit (unless a charity).
- A Community Amateur Sports Club is exempt from paying corporation tax if the turnover from trading is less than £50,000 and the whole of the profit is applied for qualifying purpose.
- There will be no share capital shown on the Balance Sheet and there needs to be a note confirming Limited by Guarantee status.
- All CLG’s except charities can take advantage of the Micro-Entities legislation.
- If the company is a registered charity, the Charity Commission rules must be complied with.
Cessation of a CLG:
- In the event of the company being wound up all assets are usually passed to another similar CLG organisation – this should be confirmed in a dissolution clause in the Articles. The Model Articles makes no provision for this.
- There is no facility under CA2006 to permit a change from a CLG to a company limited by shares – the CLG must be liquidated and a new company limited by shares incorporated.
- A charity needs to be removed from the Companies House register before advising the Charity Commission.
So there you have it. If you think that your organisation could benefit from this type of limited company, please contact me to discuss your situation in depth. As usual, I will be more than pleased to help.
If any of you would like more detailed information on any aspect of the new type of Limited Companies: The CLG & The CIO, send me an e-mail and I’ll be pleased to advise further.