Company Limited by Guarantee VS Limited Liability Company

Understanding the difference: What is a Company Limited by Guarantee?

Community projects, charities (non profit entities), societies, clubs, and other similar organisations are companies that are almost always limited by guarantee. As not-for-profit companies, companies limited by guarantee do not distribute the profits to their respective members but instead retain them in the company or utilize those for some other relevant purpose.

Contrary to non profit organisations, for-profit companies have members that have rights to certain remuneration (often in the form of assets).

A company limited by guarantee requires its articles to be drafted for their specific organization, which is basically the main work that members need to undertake.

Why set up a Company Limited by Guarantee?

The main reason community projects, charities, societies, clubs, and other similar organizations opt to be set up as a company limited by guarantee is to basically protect the people running the organization from any personal liability for the debts or losses that may be incurred by the company.

Companies limited by guarantee are viewed as more trustworthy and legitimate as opposed to an unincorporated business. As a non profit or charitable organization, a limited by guarantee company is recognized for its reliability and established credibility. Local authorities and funding bodies almost always insist on collaborating with an organization registered as a company limited by guarantee.

Understanding the difference: What is a Limited Liability Company?

If a community project, a charity, a society, club, or any other similar organization is not registered as a limited company, then the people behind its management or those running the company can be made personally liable for its unpaid debts.

Know that some community groups, charities, sports clubs, or societies can be substantial enterprises, which could prove to be a real risk as they normally come with liabilities that cannot easily be turned off. These companies may employ people for their operations, have equipment on finance contracts, or operate on leasehold premises. 

Unforeseen and unfortunate circumstances, however, like an unannounced withdrawal of financial support from a funding body can lead to such shortfalls and insufficiencies. If income or profit is not able to offset these expenditures, the company may grow insolvent, and the people behind its management can be legally made personally liable for this deficiency.

On the other hand, with the company itself being a separate legal entity in an LLC, the people who own or run the business are only held liable commensurate to the amount the shareholder or member has agreed to pay for his or her shares.

Why set up a Limited Liability Company?

The main difference between a private limited company and a company limited by guarantee is that there are no shareholders in a company limited by guarantee. Considered as one of the easiest and most effective ways to boost your professional status and establish your company as a credible and trustworthy entity, setting up a business as a limited company is the most ideal for new businesses and existing sole proprietors and traders.

Running a limited company will also enable you to compete on a level playing field with other incorporated firms who are only willing to do business with other limited companies.

Most importantly, however, an LLC is your best pick if you want to enjoy limited liability for your organization’s debts instead of risking your personal finances and assets and be held personally reliable for all your debts.

Dissolution of a Company Limited by Guarantee

A Company Limited by Guarantee can be dissolved in a few ways. However, the most notable ones include winding up and striking off.

Winding up happens when the company cannot pay off its debts. The process of winding up means that the business is closed down and the sale of assets occurs. These assets are then distributed among creditors. Winding up can happen involuntarily (debts) and voluntarily (when owners decide that it is time to stop).

The process is a bit different when it comes to striking off. The company director can apply to the governing authority (in Singapore, that is ACRA) to strike off the company’s name from the registrar. This usually happens when it has ceased to exist or the Company Limited by Guarantee has been fully wound up.

Dissolution of an Limited Liability Company (LLC)

The dissolution of an Limited Liability Company is the first step in the termination process. 

Do not confuse termination and dissolution. Dissolution does not terminate an LLC’s existence but changes the purpose of its existence. A dissolved LLC only exists for the purpose of winding up and liquidating.

With an LLC, the dissolution process begins with a ‘triggering’ event. This is an event or act that requires the LLC to stop doing business as usual and start winding up. However, the process can also start when members take a vote for dissolution.

Once the LLC is dissolved, the members have to start winding up its affairs. This usually means discharging the LLC’s debts, obligations, and other liabilities, settling and closing the LLC’s activities and affairs, and distributing the remainder of assets.

All members are liable when the process starts. Also, the company has to pay all taxes and fees to the state before it can get terminated.

Which business structure should you choose?

Deciding on the status and structure to use when forming your company should depend on the profit-sharing model you’re looking to follow for your company. This is going to be the most straightforward and logical approach you can decide on taking when weighing your options.

Go for a company that is limited by liability if it is a profit-making business that you want to set up. On the other hand, you can have your company limited by guarantee if you’re looking to put up a non profit organization.

Did this answer your question?