'limited by shares' vs 'limited by guarantee'

(Note: this page is currently being re-written in view of recent law changes. Some of the information here may no longer be current. UKcorporator's incorporation process however remains perfectly valid and effectual and complies with current law.)

By far the more common choice of company formation is a company limited by shares. Almost every company formed as a vehicle for a business venture with a view to profit is registered as a company limited by shares. A company 'limited by shares' is a company formed on the principle of having the liability of its members (otherwise known as its shareholders or owners) limited to the balance amount (if any) which remains unpaid on the shares held by its members - section 1(2)(a) of the Companies Act 1985.

A company 'limited by guarantee' on the other hand is a company formed on the principle of having the liability of its members limited to the respective amounts which the members undertake to contribute to the assets of the company if it is wound up - section 1(2)(b). Associations not for profit (such as clubs, management companies for flats in which all of the tenants are members, and associations of traders for trade protection or information exchange) are commonly incorporated as a company limited by guarantee. This type of company is useful where:

incorporation is necessary or desirable;

there is no immediate need for capital to carry out the objects of the company; and

it is desired to limit the liability of the members.

In the case of a company limited by guarantee (and formed since 22 December 1980) a member may resign or terminate his, her or its membership only if the memorandum or articles so provide, and only in the events and in accordance with the conditions set out therein. (The articles of association which UKcorporator will provide for you if you require, permit termination of membership on seven clear days' notice to the company.)
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