Companies limited by guarantee

Companies Limited by Guarantee (CLG) are private companies that do not have shares or
shareholders but instead have members called ‘guarantors’. The members agree to contribute
a certain amount (usually a nominal £1 – £10) to the company’s assets if the company is
wound up and as such the main reason for a CLG is to protect the people running the
company from personal liability for the company’s debts. Limited liability is allowed provided
the members have not acted negligently or fraudulently and not allowed the company to
continue trading whilst insolvent. As with a company limited by shares, a CLG is a legal
identity separate from the members and this allows the company to own property in its own
name and even run a business.
Companies best suited to being CLG’s are non-profit making associations such as charities,
professional, trade, and research associations, social or sporting clubs supported by private
subscriptions, and other groups of people with mutual interests. Many flat management
companies are CLG as are community interest companies and academy trusts. Sometimes
funding bodies, such as local authorities, insist on an organization being registered as a
CLG.
Profits of CLG companies are generally reinvested back into the company or used for some
other purpose as specified in the Articles of Association. Payments to board members can
be made but only as remuneration (unless repayment of expenses only) and not a dividend.
CLG’s have no shares so cannot distribute profit to shareholders or sell the shares.
Technically CLGs can distribute profits to members (unless the Articles of Association say
otherwise) but all charities and most other CLGs have a “not for private gain” clause so any
profits cannot be distributed as otherwise, the company’s charitable status becomes
invalid.
Commercial trading CLGs will likely use the term ‘profit’ in their accounts to describe an
excess of income over expenses, voluntary membership organizations usually use the term
‘surplus’. The moment a trading activity (that is not mutual) is undertaken then that is a
taxable activity. Unfortunately, this means that any grants and donations that cannot be
specifically identified as relating to a non-trading activity are regarded as being used to off-
set the trade expenditure and so become taxable.
A CLG has the same legal requirements as a private company limited by shares, as being
registered at Companies House, submitting accounts and an annual return each year to both


Companies House and HMRC within the usual deadlines. Also similarly to a share company,
a CLG company can borrow money and issue debentures which can aid the task of securing
external funding. Charitable organizations may also obtain capital through grants from the
government or local authorities, by procuring charitable donations from the public, or
charging a membership fee.
Community Interest Companies (‘CIC’s)
People who want to run a business or other activity for community benefit rather than for
private advantage can register either as a company limited by shares or by guarantee but
most CICs are CLG. The CIC limited by shares is useful where the company is being backed
financially by one or more outside bodies or individuals who can invest in it by taking shares.
There is, however, a statutory dividend cap, restricting the payment of profits out of the
company.
Under the asset lock provisions for CLG, the assets and profits must be permanently
retained within the company and used solely for community benefit, or transferred to a
charity or another CIC.
If the company is a charity, registered with the Charity Commission, HMRC will usually
require a corporation tax return but there will be no corporation tax to pay. As well as filing
accounts a CIC must complete and submit a community interest company report. This report
is placed on the public register, available to download.

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