Limited By Shares Vs Limited by Guarantee: What Are Their Differences

Ryan Patrick

Jun 19, 2024 • 6 min read

In the UK, shares or guarantees can limit a Private Limited Company (PLC).

While navigating between the two structures is complex, both stand out as unique choices. PLCs are incorporated to become legal entities that provide limited liability protection to their owners. However, it’s different for companies limited by shares and guarantees. The distinctions in the two company structures make them suitable options for different businesses.

Under both structures, members are protected from limited liability, but the structures' functions are guided by different principles to serve varying purposes.

This post is for you if you’re at a crossroads trying to differentiate these two business structures. We’ll delve into the differences between companies limited by shares Vs companies limited by guarantee.

Let’s do this.

Companies Limited by Shares

Companies limited by shares are the most popular type because they have a share capital, which determines company ownership.

These shares raise share capital by dividing into small portions called shares. The people who hold these shares own the company and are known as shareholders.

A company’s shares equate to ownership of the company and can also come with additional rights, like voting.

Voting rights allow shareholders to help decide how a company is run. Another right is to receive share payments on the company’s profits, known as dividends.

As a shareholder in a company limited by shares, your liability to the company is only limited to the amount you paid for the shares.

In pursuit of the Companies Act 2006, a company limited by shares must have at least one share and one shareholder. In simple language, you can set up a company and own it by yourself or divide your company into multiple shareholders among several shareholders.

Here are the characteristics of companies limited by shares:

Profit Distribution - The profits made by a company limited by shares are distributed to shareholders as dividends.
Capital Raising - These companies divide company shares to raise capital.
Ownership - Company ownership can be transferred easily by selling shares.
Management—Shareholders have the right to vote, depending on their shares, to determine how the company is run.

Why Set up a Company Limited by Shares?

A company limited by shares is suitable for any seeking to make profits. It fits businesses of all sizes in any industry, making it the most popular structure. Here are the reasons as to why more people prefer to set up a company limited by shares:

Owning and managing a profit-making business, solo or with others
There’s an assurance of ‘limited liability’ - shareholders are protected from any liability the business might experience. Shareholders are also free from being pursued by creditors or claimants.
Tax efficiency – A company limited by shares is tax efficient; the tax for such businesses is lower, and owners can enjoy better taxing opportunities.
Establishing a corporate identity - Before the law, the business is a separate entity.
Bidding on high-value contracts - Most are only open to incorporated businesses. However, companies limited by shares enjoy the same since more than one person owns them.
Selling business shares - A company can sell shares to raise capital investment
The business name is protected.
More success for business funding and investment opportunities
Access to more generous pension schemes
The company can buy and own assets.

Companies Limited by Guarantee

Companies Limited by guarantee (LBG) are set up without share capital, meaning there are no shares or shareholders. Instead, some members guarantee the company by paying a fixed amount of money, which is the guarantee.

The guarantee in a company LBG means the guarantors have a ‘guarantee’ toward debts if the business comes to its knees through dissolution.

Membership in companies limited by guarantee doesn’t equate to company ownership. The members have the right to vote on matters that affect the company's running, but they have no right to receive share profits. Instead of the company paying dividends to its guarantors, the money is reinvested to grow the business.

Here are the characteristics of companies limited by guarantee:

Non-Profit Focus - Companies limited by guarantee are non-profit or charity organisations.
Profit Distribution - These companies' profits are reinvested or repurposed for other objectives.
Ownership and Control - Members own the business and have control over it, which can vary depending on the company’s constitution.
Transparency and Accountability—Companies limited by guarantee must operate transparently and be accountable for every amount of money they receive, especially for registered charities.

Limited by Shares Vs Limited by Guarantee: For Profit or Non-profit?

Generally, companies limited by shares are commercial or profit businesses, whereas those limited by guarantee are non-profit organisations and charities. Before incorporating a company in the UK, consider what you want to do with your profits.

If you want to keep the profits from a limited company as a source of personal income, set up a company limited by shares—the most popular type of limited company. But, in a company limited by guarantee, you’ll be reinvesting the profits from the organisation.

Why Form a Company Limited by Guarantee?

A company limited by guarantee is designed to serve specific needs as a non-profit organisation. They range from small community-based organisations to large international charities. Here are the reasons for setting up a company limited by guarantee:

Managing a non-profit enterprise as a charity solo or with partners
Members are protected from limited liability.
Legitimise a non-profit organisation to project a professional image.
Compliance of eligibility criteria as per the governing bodies
Access to grants and funding
Attracting more support in investment, membership, or donations
The name of the non-profit organisation is protected.

A company limited by guarantee can be used as a commercial business, but there’s little benefit to choosing this structure over a company limited by shares.

Key Differences Between Limited by Shares to Limited by Guarantee

Companies limited by shares and companies limited by guarantee are different in several ways. They include:

1. Purpose and Profit Distribution

Companies limited by shares are profit-making businesses, and profit is shared as dividends to shareholders.
Companies limited by guarantee are non-profit making, and any profits are repurposed.

2. Ownership

Two or more shareholders own companies limited by Shares.
Limited by Guarantee companies are owned by guarantors, and there are no shareholders.

3. Liability

Limited by Shares - members have limited liability, meaning their liability EQUATES the shares they hold.
Limited by Guarantee - Members agree to contribute a specific amount to fund non-profit organisations.

4. Capital Raising

Limited by Shares Companies sell shares to raise capital
Limited by Guarantee funding for these companies comes from grants, membership, or donations.

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Frequently Asked Questions

What is the main difference between companies limited by shares and companies limited by guarantee?

The main difference between companies limited by shares and limited by guarantee is that the latter is a non-profit company, whereas the former is a commercial business. Limited by shares, companies issue shares to holders to raise capital while LBG gets funding from guarantors who contribute an agreed amount to run a charity organisation.

What does limited by shares mean?

Limited by shares means shareholders are protected from liabilities to the shares they own to creditors or claimants when the business goes south. If a company limited by shares faces insolvency, shareholders have no part in its liabilities beyond their share value, and their assets can’t be at risk.

What does limited by guarantee mean?

A company limited by guarantee is a unique legal entity responsible for its debts. These companies get funding from guarantors whose personal assets are protected from liability. Guarantors are only responsible for the company's debts up to the amount they guarantee.

In Summary

A company limited by shares vs. a guarantee has viable business structures incorporated for different purposes.

Choosing between the two is mainly dependent on the purpose of the business. A limited shares structure will work if you want to launch a company for commercial purposes. As for non-profit organisations, a limited-by-guarantee structure is suitable.

A company limited by shares sells shares to raise capital, and the shareholders’ assets or finances are protected from risks. Companies limited by guarantee are non-profit, and guarantors contribute a specific amount to run the organisation or charity.

Before incorporating a company, it’s essential to understand the differences between the two structures to ensure you make informed business decisions. Forming a business that aligns with your objectives and values is also highly beneficial.