Limited by guarantee

A commercial company exists ultimately to distribute annual profits to its members, and any remaining assets on its dissolution. A shareholder will have bought shares in the company, and this ownership stake will entitle the member to receive such distributions in proportion to the value of his/her shares. A member's liability to the company is limited to any sum still owed by him/her to the company in payment for his/her shares, hence this liability is said to be 'limited by shares'.

A charitable company ought not usually be owned in this way, because charity assets must be applied for charitable purposes and not be distributed to members for their private gain. Most companies limited by guarantee are charities or other non-trading companies. In a company limited by guarantee each trustee undertakes to pay a specified amount, usually nominal, if the company is wound up while he/she is a member (or within a year of ceasing membership). Hence the liability of its members is limited to the amount of this guarantee - usually £1 as a nominal amount.

Disadvantages

Because a company is subject to company law and the requirement to file accounts and other information with the Registrar of Companies, it may be more complex and costly to set up and administer than a trust.

Find out more about other legal matter issues and examples in the In more depth section.