When to use a company limited by guarantee

Q: When does the law require a guarantee company?

Charitable companies. GOV.UK guidance says a charitable company has to be limited by guarantee rather than shares. The alternative for a charity is a CIO; see charitable company or CIO. Right to manage companies. Section 73(2) of the Commonhold and Leasehold Reform Act 2002 requires a RTM company to be a private company limited by guarantee whose articles include acquiring and exercising the right to manage the premises. See right to manage companies. Commonhold associations. Section 34 of the same Act requires a private company limited by guarantee with a guarantee of £1 from each member. Outside these cases the choice is open, and the factors below decide it.

Q: How might the choice work in practice?

Illustration only. A tennis club with 200 members wants to sign a 20 year lease and employ a coach. The members want limited liability, one vote each and the freedom to join and leave each season. They form a company limited by guarantee with a £1 guarantee per member, adopt articles that apply all income to running the club, and admit members by application. Subscriptions and court fees from members are considered under the mutual trading rules, while income from hiring courts to the public is taxable. Nobody holds more than 25% of the votes, so the company reports that it has no registrable PSC. Two friends opening a café nearby want to share profits and possibly sell in five years. A guarantee company would block both aims, so they form a company limited by shares.

A company limited by guarantee suits an organisation whose members want limited liability and a say in how it is run, but do not expect dividends or to sell a stake. It is the required form for charitable companies, right to manage companies and commonhold associations, and the usual choice for clubs and membership bodies. If owners want to take profits or bring in investors, a share company is the better fit.

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What is the real question when choosing guarantee or shares?

The question is whether the people behind the company expect a financial return from it. A guarantee company has members instead of shareholders. Under section 3(3) of the Companies Act 2006 their liability is limited to what they undertake to contribute if the company is wound up, which the model articles for guarantee companies set at £1. GOV.UK guidance on guarantors says they control the company and make important decisions but do not usually take profit from it; surpluses stay in the company or go to its purposes.

A guarantee company cannot have share capital. Section 5 prevents a company being formed as, or becoming, a guarantee company with a share capital, and treats any clause dividing its undertaking into shares or interests as a share capital. So there is no equity to sell, pledge or reward people with.

For the mechanics of the guarantee itself, see companies limited by guarantee. This page is about when the form is the right choice.

When does the law require a guarantee company?

Charitable companies. GOV.UK guidance says a charitable company has to be limited by guarantee rather than shares. The alternative for a charity is a CIO; see charitable company or CIO.
Right to manage companies. Section 73(2) of the Commonhold and Leasehold Reform Act 2002 requires a RTM company to be a private company limited by guarantee whose articles include acquiring and exercising the right to manage the premises. See right to manage companies.
Commonhold associations. Section 34 of the same Act requires a private company limited by guarantee with a guarantee of £1 from each member.

Outside these cases the choice is open, and the factors below decide it.

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Why does it suit clubs, societies and membership bodies?

Membership in a guarantee company works like joining a club rather than buying a share. Under the model articles for guarantee companies, a person becomes a member by completing an application form approved by the directors and having it approved (article 21). A member can leave by giving seven days’ written notice, membership is not transferable, and it ends on death (article 22). Members can come and go each year without share transfers, stock transfer forms or valuations.

Voting is also democratic by default. Section 284 gives each member of a company without share capital one vote on a written resolution and on a poll, subject to the articles, whereas in a share company votes usually follow the number of shares held. Members holding at least 5% of total voting rights can require the directors to call a general meeting under section 303(2)(b).

There can be a tax advantage for some bodies too. HMRC’s Business Income Manual at BIM24005 explains that transactions with members can be a mutual trade, which is outside Corporation Tax if the legal framework passes the mutual trading tests. The immunity covers only trading with members; income from non members and investment income remain taxable. See Corporation Tax for clubs and associations.

Why is it used for social enterprises and community companies?

The CIC Regulator’s guidance says a community interest company must be limited either by guarantee or by shares and should choose carefully, because once incorporated a guarantee company cannot be converted into a share company or the other way round. It suggests that if the founders do not want to pay dividends, a guarantee CIC may be the best type, and it notes that funders tend to look more favourably on applications from CICs limited by guarantee. It also describes the guarantee company as the traditional form for companies operating without a motive of making a profit for distribution to members. See community interest companies.

Grant funders often want assurance that money cannot leave through dividends or a sale of shares. A guarantee structure, with articles that apply income to the objects, gives that assurance in the constitution itself.

When is a share company the better choice?

The founders want to take profits as dividends, now or later.
Outside investors will put money in and expect equity.
The owners may want to sell the business, or reward staff with shares or share options.
Ownership needs to be unequal, for example one founder controlling 60% of the votes because they put in most of the money. That can be written into a guarantee company’s articles, but it fits a share structure more naturally.

The CIC guidance asks exactly these questions: whether the company wants to pay dividends to investors and whether that will help its funding. If the answer is yes, it points towards shares. Because the form cannot be changed later, it is worth asking these questions before incorporation rather than after.

Who counts as a person with significant control?

In a guarantee company control comes from voting rights and the power to appoint directors, not shareholdings. GOV.UK guidance says a guarantor with more than 25% of the voting rights is a PSC. A club or association with dozens of members, each with one vote, may have nobody who meets any of the conditions. GOV.UK guidance says that if a company does not have a PSC, it must tell Companies House. A small guarantee company with two or three founding members, by contrast, will usually have each of them as a PSC.

How might the choice work in practice?

Illustration only. A tennis club with 200 members wants to sign a 20 year lease and employ a coach. The members want limited liability, one vote each and the freedom to join and leave each season. They form a company limited by guarantee with a £1 guarantee per member, adopt articles that apply all income to running the club, and admit members by application. Subscriptions and court fees from members are considered under the mutual trading rules, while income from hiring courts to the public is taxable. Nobody holds more than 25% of the votes, so the company reports that it has no registrable PSC.

Two friends opening a café nearby want to share profits and possibly sell in five years. A guarantee company would block both aims, so they form a company limited by shares.

What mistakes come up most often?

Choosing a guarantee company for a business whose owners later want dividends or a sale, then finding the form cannot be converted.
Assuming not for profit status means no Corporation Tax; mutual trading protects only trade with members.
Using articles that do not set out how members are admitted and removed, so the register of members drifts out of date.
Forgetting that a residents’ or club company still files accounts and a confirmation statement like any other company; see flat management company directors.
Reporting the founders as PSCs years after the membership has grown so large that none of them meets the 25% test.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.