Difference Between Companies Limited by Shares and Companies Limited by Guarantee

There are several ways of structuring a company to start a business. Different nomenclatures are adopted for the purpose of taxation and profit sharing. Two such formations are Companies Limited by Shares and Companies Limited by Guarantee that are more prevalent in Britain and Ireland. People are often confused between these two entities and do not know which one they should adopt for their purposes. This article will differentiate between Companies Limited by Shares and Companies Limited by Guarantee by discussing their features and pros and cons.

There are both similarities as well as differences in the two types of companies. A company limited by guarantee is lesser known of the two types and is generally formed in case of non profit companies. It tends to have members rather than shareholders. The most notable difference between these two entities is that companies limited by shares exist for making profit whereas companies limited by guarantee are non profit making companies. Guarantee companies are formed to provide a specific service to public. These two entities also differ in their articles of association and memorandum as companies limited by shares have very general clauses that give them liberty to engage in any legal trade or business activity.

On the other hand, companies limited by guarantee have specific clauses and rules dictating their areas of operation. Prominent example of companies limited by guarantee are charities that have self imposed restrictions on them to assure the donors that their donations are spent according to their wishes and not in a manner that they do not approve. This one point helps companies limited by guarantee to raise funds more easily than companies limited by shares as they can show how they propose to use the money.

There are no major differences in the structure of the two types of companies and both Companies Limited by Shares and Companies Limited by Guarantee have at least one director, a secretary and a declarant at the time of coming into existence.

Another major difference between Companies Limited by Shares and Companies Limited by Guarantee is the absence of share capital in the case of companies limited by guarantee. There are members and not shareholders in case of a guarantee company where members pledge to contribute a predetermined sum at the time of formation of the company (Pound 1). Guarantee company structure is mostly used by schools, clubs, churches, research organizations and to purchase freehold property.