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Author: Gaurav Shanker, Managing Partner And Yamini Mishra, Associate |

Article by Business Law Chamber

A company limited by guarantee or a guarantee company is one wherein the liability of its members is limited by the memorandum and the members agree to pay a nominal amount in the event of company being wound up. Unlike the concept of shareholders holding shares and the ownership of the company, a guarantee company is owned by members called guarantors.

A guarantee company is mostly opted for non-profit making purposes such as charities, NGOs and other social enterprises where the purpose is not to gain money/ profit. The objective of this type of company is to serve the public and their interests. Similar to a company limited by shares, a guarantee company may also make profits, however, the profits earned by the company are retained by the company and re-invested again in the company in order to utilize it for further non-profit objectives. In a guarantee company, the profits of the company are not distributed among the guarantors. These types of companies receive their initial funding through government grants, endowments, donations, etc.

Apart from profit distribution, the working of a guarantee company is quite similar to any other company. It is a separate legal entity and has the right to carry out activities in the name of the company.

Types of guarantee company

A guarantee company may further be categorized into:

I. Company limited by guarantee having share capital

The initial capital or working funds are invested by its members as most of these companies might not get support for initial capital through grants, donations, endowments or any other sources. However, eventually, the funds can be availed through the government grants, donations etc. Due to the initial investment by the members, they hold a shareholding in the company in proportion to the capital invested.

II. Company limited by guarantee not having share capital

These are the typical guarantee companies where the initial capital is received through sources like endowments, grants, donations, subscriptions, fees etc.

Benefits of a Company Limited by Guarantee

  1. A guarantee company is a separate legal entity from its guarantor which makes the company liable for its own debts.
  2. The liability of the members/ guarantors of a guarantee company is limited only to the extent of the guarantee provided by them, therefore, they cannot be held personally liable for the debts of the company.
  3. In order to seek funds and grants, a company needs to build trust and confidence amongst the government and other donors. Registering a company as a company limited by guarantee boosts the status of the company while adding value and credibility amongst the donors and government authorities.