What is a Company Limited by Guarantee?

Sometimes referred to as a guarantee company, a company limited by guarantee is a business organization that is usually not incorporated and is formed for purposes that are considered non-commercial. An entity of this type includes such organizations as private clubs and various sorts of charities. While known by other names in different countries, a company limited by guarantee is the common name used in the United Kingdom to identify these types of business enterprises.

One of the distinguishing characteristics of the participants in the company limited by guarantee is that the actual members of the organization covenant to provide at least a nominal payment toward any of the debts of the entity in the event it becomes financially insolvent. The level of this commitment is limited, in that members are not expected to cover all debts of the entity. Instead, specified types of debt are covered by this provision. Often, there are maximum percentages of the specified debts that the membership are expected to cover. For vendors, this means that even if the entity fails at some point, they do have some guarantee of receiving at least a partial payment of any outstanding balance owed by the guarantee company.

There is no profit distribution with a company limited by guarantee. For this reason, an entity of this type qualifies as a charity in the United Kingdom. Members of the guarantee company are not considered investors, but guarantors. This does not mean that members do not receive some sort of benefit from their association with the company limited by guarantee. For some, the value lies in the business contacts made through the association with the guarantee company that ultimately allow them to grow their own for-profit businesses. In addition, many nations allow members of a company limited by guarantee to be reimbursed for expenses that are incurred as a result of their voluntary service to the organization. This may even include compensation for income that is lost while volunteering to participate in a company project or event.

The company limited by guarantee model is often considered an ideal way to create an ongoing entity that serves a purpose in the community, and eventually becomes self-sustaining through investments made by the guarantee company. For members of the entity, the limited liability helps to ensure that even if the organization ultimately fails, the extent of their loss is much lower that would be the case if they were shareholders in a for-profit organization. Depending on the personal goals of the individual, being a guarantor of a company limited by guarantee may be the ideal way to network with others and build up a private business, while also avoiding the chance of losing a great deal of money as a result of that association.