Guarantee Company - Not for Profit Companies - Charities
The following questions have been designed to give you
an overview of what a company limited by guarantee is and
whether it is a suitable format for your circumstances.
What
is a company limited by guarantee?
Why
form a company limited by guarantee?
What
are the differences between a company that is limited by
guarantee and company limited by shares?
What
is the constitution of the company?
What
are objects?
Describing
beneficiaries of the company's objects
Payment
of Trustees (Directors)
Paying
expenses for Trustees
What
is a Company Limited by Guarantee?
Companies
limited by guarantee are private limited companies where
the liability of the members is limited. A guarantee
company does not have a share capital, but has members who
are guarantors instead of shareholders. Limitation of liability
takes the form of a guarantee from its members to pay a
nominal sum in the event of the company being wound up while
they are a member or within one year of their ceasing to
be a member. The amount of money that is guaranteed can
be as little as £1 and will be stated within the constitution
of the company (the Memorandum & Articles of Association).
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 (eg 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 traveling 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 (eg 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,
eg 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.
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