Organisations Information Kit
Company Limited by Guarantee
The following factsheet list some advantages and disadvantages of incorporating as a Company limited by guarantee. Sections include:
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Incorporation
What is a Company Limited by Guarantee?
An organisation can incorporate as a company limited by guarantee when there are a number of stakeholders whose interests have to be accounted for and where a profit motive is not the prime objective of the organisation. The regulator for companies limited by guarantee is the Australian Securities and Investment Commission (ASIC).
"Limited by guarantee" means that if the company is wound up, and it is in debt, the liability of members is guaranteed to be a nominal amount (often in the range of $20 - $100). Directors of a company limited by guarantee will be subject to all of the duties and obligations for a commercial company set out in the
Corporations Act 2001.
A company limited by guarantee has the following key features:
- it can trade or operate throughout Australia;
- the liability of members is limited;
- there is a cost involved in establishing the company; and
- there are ongoing reporting and administrative requirements.
Some Advantages
1. Separate Legal Entity
A company limited by guarantee is a separate legal entity distinct from its members, as are all incorporated bodies.
2. Limited Liability
The liability of members is limited to a guaranteed amount that the members contribute in the event the company is wound up and its assets are otherwise insufficient to meet its liabilities. The amount of the guarantee is specified in the constitution and is often fixed at a nominal sum.
The
Corporations Act 2001 also has clear provision for companies to indemnify their officers and auditors in certain circumstances, which the various associations incorporation statutes do not have.
3. Termination of Membership and Addition of Members
Members can terminate their membership in accordance with the constitution of the company. A past member will not need to contribute towards the debts and liabilities of any contracts once they cease to be a member.
There is also flexibility for the addition of new members to the company under the company's constitution after registration.
4. National Registration
When a company is registered under the
Corporations Act 2001 it is automatically registered as an Australian company and can operate anywhere in Australia. Note that an incorporated association can also operate nationally, although it is required to register with ASIC to do so.
5. Objectives not Restrictive
As a company limited by guarantee, there are no restrictions on an organisation's ability to trade, earn and distribute profits; however, the organisation would not be able to distribute profits to its members or issue shares, unless it changed its company type. The constitution of the company will set out the purposes for which the funds can be used. This may make it easier to raise funds for an organisation's principal objectives.
6. Indemnifying Directors
The
Corporations Act 2001 provides that in certain circumstances, a company will be allowed to indemnify any officer or auditor against a liability. In certain circumstances, the Act permits a company to indemnify its officers against legal costs.
Some Disadvantages
1. Establishment Costs
A company limited by guarantee can be expensive to establish (in excess of $1000).
It is almost certain that you will need a lawyer to get the documentation in order and to advise you on the company's ongoing regulatory and filing requirements.
2. Disclosure and Reporting Requirements
The administrative requirements on a company are more onerous than for incorporated associations. A company limited by guarantee will be subject to the disclosure requirements that apply to public companies under the
Corporations Act 2001. The Act imposes financial reporting and auditing obligations on companies. Visit the ASIC website for the latest reporting requirements.
3. The Name of the Company
Generally, companies limited by guarantee must use the word "limited" or the abbreviation "Ltd" in their name, but ASIC may waive this requirement for a non profit company. To do so, the company must pursue charitable purposes only and apply its income in promoting those purposes; must not make distributions to its members or pay fees to its directors; and the directors of the company must approve all other payments the company makes to its directors.
Directors' Duties
A company limited by guarantee must have at least 3 directors and at least one secretary. Officers of the company (ie the directors, secretary and those within the definition of officers in the
Corporations Act 2001) are subject to all the duties and liabilities placed on directors by the Corporations Act and the common law (even where directors are acting in a voluntary capacity). The constitution can include provisions indemnifying officers of the company.
The obligations imposed by the
Corporations Act 2001 on directors of companies are more onerous than the obligations imposed on officers of incorporated associations; however, they are more clearly defined. In contrast the equivalent obligations of members of the committee of an incorporated association have not been as well defined through court processes.
Directors and officers liability insurance is available to cover an officer's liability.
A company may also pay the premiums for a policy indemnifying its directors for the legal costs of defending a proceeding, whatever the outcome.
Useful Web Resources
More information on companies limited by guarantee and directors' liability can be found at:
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Incorporation
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