Limited By Shares vs Limited by Guarantee: What’s The Difference?

When it comes to starting your business, many decisions must be made. 

One of the most important decisions you’ll make is choosing the business structure. If you choose to use a company structure, you must then decide whether your company will be limited by shares or limited by guarantee. 

In this article, we’ll explain what a company limited by shares is, what a company limited by guarantee is, and the differences between them

Read along!

What is a company limited by shares?

A company limited by shares limits a member’s liability to any unpaid amount on their shares. Companies limited by shares are owned by shareholders. In Australia, the most common type of company is a company limited by shares.

A company limited by shares can be a private or public company. Companies limited by shares end with the word “limited”, which means they have limited liability. Therefore, the liability of each shareholder is limited to the value of their shares. If a shareholder is yet to pay for these, then they’ll be liable to pay it back.

Example

Sarah has purchased some shares in her friend’s new company, W&A Designs. She gets a percentage of ownership in the company. Sarah holds 500 shares, priced at $1.50 each. 

If the company winds up, then she’ll have to repay her shares. If she pays this amount before, then she will have no liability.

The rights and obligations individuals have in a company limited by shares are in proportion to their individual investment. Shareholders have limited liability and are obligated to pay the company for the shares they have taken in it. 

In contrast, the directors are not liable for the company’s debts. Directors are only personally liable if they breach their directors’ duties and their legal obligations or if they participate in activities that result in the company suffering a loss, such as wrongful or fraudulent trading.

What are the advantages of a company limited by shares 

The advantages of a company limited by shares include the following:

• If the company has financial difficulties, the personal assets of members aren’t at risk, and the company’s debts don’t become the debts of its shareholders due to limited liability
• If a member’s shares are paid in full, they’re not liable for the debts of the company
• Due to a company also being a separate legal entity, this also ensures that its members can’t be held personally liable for the debts of the company
• Your company is more likely to grow using this company structure as it will attract third party investors
• This company structure is flexible due to it providing investors with the ability to buy and sell shares

What is a Company Limited By Guarantee?

Companies limited by guarantee are public companies that limit a member’s liability to the fixed amount they have contributed to the company if the company is wound up. Unlike a company limited by shares, a company limited by guarantee has members instead of shareholders. Due to this, the liability of a member is a fixed amount. 

The guarantee each member has contributed is outlined in the company’s constitution. The guarantee is usually payable if the company winds up. If a company has to be wound up and it doesn’t have sufficient assets, each existing member of the company is obligated to contribute an amount. 

If the present members are unable to meet the guarantee, then past members of the company are required to contribute. However, past members who ceased to be members are exempt from contributing.

This company structure is generally used by the following groups:

• Non-profit organisations
• Charity organisations
• Sports clubs
• Bowling clubs
• Cultural clubs 

Companies limited by guarantee are public companies and are therefore required to be registered under the Corporations Act 2001(Cth). Furthermore, these companies are required to comply with the relevant sections of the Act to which they are subject.

You should be aware that you can convert your company from being limited by guarantee to being limited by shares. In order to do this, you have to comply with the requirements in section 163 of the Corporations Act 2001( Cth) and section 164. 

What are the advantages of a company limited by guarantee?

The advantages of a company limited by guarantee include the following:

• When a company limited by guarantee is wound up, its members are only required to repay the guarantee they gave
• Due to companies limited by guarantee not having the ability to issue shares, it is impossible for anyone to gain a controlling interest or profit by selling shares. This characteristic is useful if you have created your company to conduct non-profit activities

Liability

Liability is one of the foundational elements of company law. Companies usually have limited liability, which means that the people behind them aren’t personally responsible for the company’s losses.

You can register one of two types of companies under the Corporations Act 2001 (Cth). These are proprietary companies and public companies. Each has a varying degree of liability and distributes stock differently. Both types of companies are limited either by shares or by guarantee.

Conclusion

Having an understanding of the two types of company structures is crucial before you register your company. Being aware of the degree of liability your company has is crucial, as it will determine how you run your business.

If you’re still feeling unsure about which company structure you should use, you should hire a lawyer for legal advice. A lawyer can also provide advice in regard to setting up your company.