Companies are categorised under Companies Act, 2013 on the basis of various factors such as share capital, liability of the shareholders, ownership etc. Company Limited by Guarantee is defined under section 2(21) of Companies Act, 2013 as a company in which the members’ liability is limited to the extent of amount as specified in Memorandum of Association
Topics covered in this article are
1. What is Company Limited by Guarantee?
2. Share capital in Company Limited by Guarantee
3. Features of Company Limited by Guarantee?
4. Provisions under Companies Act, 2013
5. Difference between Guarantee company and Company limited by share capital
6. Memorandum of Association
1. What is Company Limited by Guarantee?
If a company with limited liability is to be formed, there are two options with the promoters either to limit the liability of shareholders to value of shares purchased or the amount of guarantee given by them. In this type of company liability of shareholders is limited to individual guarantees given as mentioned in Memorandum of Association
2. Share Capital in Company limited by Guarantee
A company limited by Guarantee can be of two types i.e, company limited by guarantee with share capital or company limited by guarantee without share capital. In a company with share capital, initial funds obtained as working capital are in the form of share capital. After that company runs on other sources such as grants, donations, subscriptions etc. Most of the company limited by guarantee are non-profit companies or charitable institutions
3. Features of Company Limited by Guarantee
1. The members give an undertaking in Memorandum of Association to contribute a given amount on winding up
2. These companies usually do not have share-capital
3. The guaranteed amount is to be paid only on the account of winding up
4. The guarantors are not personally liable for debts of the company so their personal assets are not liable
5. Company Limited by Guarantee must mandatorily have ‘limited’ in its name
4. Provisions under Companies Act, 2013
· A company limited by guarantee not having share capital registered on or after April 1914 shall not give any provision in Memorandum of Association or Articles of Association, to any person the right to participate in divisible profits of the company
· The guarantors shall not be liable to pay the guaranteed amount before winding up of the company
· Articles of Association of a company limited by guarantee must specify the number of members with which the company is to be registered
5. Difference between Company limited by Guarantee and Company limited by Shares
In both, company limited by guarantee and shares the members have limited liability as stated in the Memorandum of Association. However, some of the differences are:
· Members of Company limited by guarantee have liability limited to the amount as guaranteed by the member. In case of company limited by shares the shareholder is liable to the extent of unpaid amount of share capital held by him
· In company limited by guarantee the members will be called upon to discharge their liability only on commencement of winding up of the company. In case of company limited by shares, members can be liable to pay the unpaid amount of shares at any time, either during the life of the company or on winding up
· The membership of guarantee company may carry rights or privileges different from those of companies limited by shares
6. Memorandum of Association
MOA of every company shall specify certain clauses as prescribed under Companies Act, 2013 such as name clause, objects clause, liability clause etc. Under Liability clause a company limited by guarantee must specify that the members have limited liability and the amount guaranteed by each member respectively. MOA should be in form specified in Table B for companies limited by guarantee without share capital and Table C for company with share capital
So, the company limited by guarantee does not have share capital and use other sources of fund as working capital.
These types of companies are used for charitable purposes or operate as non-profit organisation.
Frequently Asked Questions
1. Can a guarantee company distribute profit to members?
Even though it is not given under Companies Act that profit should not be distributed, AOA of the company states that the profits are not to be distributed as usually these types of companies are for non profit objectives
2. When will the members of a guarantee company have to make their contribution?
In case of guarantee company, the members will be liable to pay such amount as specified in MOA only on winding up of the company