What Is a Company Limited by Guarantee? (2022 Update)

As someone who’s thinking about starting a company, have you ever wondered, ‘What is a company limited by guarantee?’ 

In Australia, this legal structure is commonly used by charitable organisations, not-for-profit organisations, and recreational or sporting clubs.

In this article, we’ll explain what a company limited by guarantee is, the different types of companies limited by guarantee, the rights members of companies limited by guarantee have, what obligations companies limited by guarantee have, and answers to other frequently asked questions. 

Read along! 

What is a Company Limited by Guarantee in Australia?

A company limited by guarantee is a public company where a member’s liability to the company is limited to the amount they contributed to the company in the event the company is wound up. 
This amount that has been contributed is outlined in the company’s constitution and is generally nominal. Due to companies limited by guarantee being public companies that are registered in accordance with the Corporations Act 2001 (Cth), they must comply with the sections of the Act that apply to them.

What are the key features of companies limited by guarantee?

The key features of a company limited by guarantee include the following:

• Companies that are limited by guarantee are not allowed to pay dividends
• Companies limited by guarantee can’t issue shares. As a result, no one can profit from selling shares or obtain a controlling interest 
• Every member of the company is entitled to one vote
• Due to members not being able to sell shares, most commercial or revenue-raising companies avoid using this company structure. Instead, companies that are formed for charitable purposes typically use this company structure 
• Companies limited by guarantee generally use a company constitution that outlines the specific rules that govern their internal affairs 
• A company limited by guarantee can also use the replaceable rules that are contained in the Corporations Act. However, their constitution will prevail over any rules that conflict with it
• In a company limited by guarantee, the directors of the company are typically subject to the same legal liabilities, responsibilities and duties other directors of registered public companies are subject to. These are the director liabilities, responsibilities and duties that are contained within the Corporations Act
• Companies limited by guarantee that engage in business activities, including issuing securities besides shares, are governed by certain sections of the Corporations Act 
• Annual general meetings are usually held by companies limited by guarantee

What are the types of companies that are limited by Guarantee?

There are three primary types of companies limited by guarantee. They include the following:

1. Small companies limited by guarantee
2. Companies limited by guarantee that have annual revenue that’s under $1 million
3. Companies limited by guarantee that have annual revenue that’s $1 million or greater

What is a ‘Small Company Limited By Guarantee’?

Section 45B of the Corporations Act states that a company is categorised as a ‘ small company limited by guarantee’ if it meets the following criteria during a financial year:

• If it was a company limited by guarantee during the entire financial year
• It was not a deductible gift recipient during any time within the financial year
• During the financial year, its revenue (or consolidated revenue) was below $250,000.

What are the financial reporting obligations of a ‘Small Company Limited By Guarantee’?

Generally, small companies limited by guarantee have very few financial reporting obligations. However, when they are instructed by a member of the company or by the Australian Securities and Investments Commission (ASIC), they must do the following:

• Create a financial report or audit the report
• Create a director’s report
• The company must inform its members that the annual report has been created 

What is a company limited by guarantee that has annual revenue that’s under $1 million?

These are companies that have a revenue greater than $250,000 but lower than $1 million.

What are the financial reporting obligations of a company limited by guarantee with annual revenue under $1 million?

• Create a financial report 
• This type of company can choose to review its financial report instead of having it audited. However, this option isn’t available to Commonwealth companies, subsidiaries of commonwealth companies or commonwealth authorities 
• This type of company is required to create a director’s report. However, fewer details are required for these reports compared to the reports of other companies
• This company type is required to provide annual reports to company members who request them 

What is a company limited by guarantee that has annual revenue that’s $1 million or greater?

These are companies limited by guarantee that have annual revenue of $1 million or more. 

What are the financial reporting obligations of a company limited by guarantee that has annual revenue that’s $1 million or greater?

• Create a financial report 
• The company must audit the financial report 
• This type of company is required to create a director’s report. However, it requires fewer details than other companies’ reports
• Members of this type of company must receive annual reports upon request

What rights do members of a company limited by Guarantee have?

The members of a company limited by guarantee company have the following rights:

• They are provided with the right to access the company’s register of members
• Members have to be provided with a copy of their company constitution 
• Members have the right to access meeting minutes
• Members of a small company that is limited by guarantee have the right to access directors’ reports and financial reports if they are requested by at least 5% of the members of the company
• Members of a large company that is limited by guarantee have the right to access directors’ reports, and financial reports
• Members of small and large companies limited by guarantee have the right to access a financial report and directors’ report

What obligations do companies limited by guarantee have?

The obligations that companies limited by guarantee have include the following:

• Companies limited by guarantee must make their records and books available so that directors can inspect them
• This company type is required to keep written records of member meetings, and member resolutions
• Companies limited by guarantee must ensure that members are not paid any dividends
• Meetings are required for this type of company under the Corporations Act
• If the company limited by guarantee is a registered charity it must comply with additional governance standards 

You should be aware that if your company limited by guarantee is a charity that’s registered under the Australian Charities and Not-for-profits Commission (ACNC), your company will most likely be exempt from certain obligations that apply to public companies under the Corporations Act. Additionally, if your company is a charity registered with ACNC, it will be required to comply with the Australian Charities and Not-for-profits Commission Act 2012.

Conclusion 

In the event that you are planning to create a charitable or not-for-profit organisation, this is a suitable company structure to use. If you want to make sure you choose the right company structure, you should hire a lawyer for legal advice. 

A lawyer can provide you with further information in regards to how a company limited by guarantee works and the other company structures that are available.