Unless you've been living under a rock with only a business dictionary for entertainment (or just never fancied reading about company law in your spare time), ‘companies Limited by guarantee’ might sound like legal mumbo-jumbo. 

Unlike a standard limited company, this structure is usually used by charities, non-profits, clubs, and associations - organisations that exist to reinvest their income rather than distribute profits to owners.

But how does it actually work? And more importantly, is it the right setup for your business?

In this guide, we’ll break it all down in plain English without jargon - just a clear, simple explanation of what a company limited by guarantee is, how it works, and the key pros and cons. By the end, you’ll have a solid understanding of whether it’s the best choice for your organisation.

What is a company Limited by guarantee?

A company Limited by guarantee is a type of business structure that doesn’t have shareholders or owners in the traditional sense. Instead, it has members who act as guarantors. 

These members don’t own shares or take profits, instead, they agree/’guarantee’ to contribute a small, pre-agreed amount (often just £1) if the company runs into financial trouble.

This setup is most commonly used by charities, clubs, social enterprises, and professional associations—essentially, organisations that want the benefits of being a company (like limited liability) without the focus on making profits for shareholders.

• Instead, any profits are reinvested into the organisation’s purpose rather than being distributed. 
• A company limited by guarantee is governed by articles of association (which set out how it operates) and is managed by directors, who oversee the organisation’s activities and ensure it stays compliant with legal requirements.

If you’re running a business that needs to reinvest its income, or you’re setting up a non-profit organisation, a company limited by guarantee could be a perfect fit.

Company Limited by guarantee vs. a private Limited company vs. a charity

FYI here’s a comparison table that clearly explains the difference between non–for-profits and private companies.

Are there any downsides?

While a company Limited by guarantee has many benefits, it’s not the right fit for everyone. Here are a few things to consider:

• No profit distribution – Any surplus must be reinvested, so it’s not suitable if you want to take dividends.
• More admin – You’ll need to file annual accounts and reports with Companies House.
• Ongoing compliance – Directors have legal responsibilities to ensure the company operates correctly.

If your goal is to run a profit-driven business, a standard limited company may be a better option.

How to set up a company limited by guarantee

Setting up a company Limited by guarantee is straightforward, here’s what you need to do:

1. Choose a company name – Check availability on Companies House.

2. Appoint directors and members – You’ll need at least one of each.

3. Prepare articles of association – This sets out how the company will be run.

4. Register with Companies House – Apply online, full information on costs can be found on the Companies House website.

5. Open a business bank account – Essential for managing finances.

6. Understand tax obligations – Most won’t pay Corporation Tax, but some exceptions apply.

Need help? Crunch can guide you through the process! 

Tax implications - when does a company limited by guarantee pay tax?

A company Limited by guarantee isn’t automatically exempt from tax—it still has to file accounts and may be liable for Corporation Tax if it generates taxable income.

However, if the company is a registered charity, it may qualify for tax exemptions on certain income, such as donations and grants. Non-charitable companies limited by guarantee may need to pay Corporation Tax on any surplus income from trading activities.

What happens if you want to close one down?

If you no longer need your company Limited by guarantee, you can apply for voluntary dissolution through Companies House, but there are a few steps to take first:

1. Settle any debts and obligations – The company must have no outstanding liabilities.

2. Distribute remaining assets – If it’s a charity, assets must be transferred to another charitable organisation.

3. File final accounts and a DS01 form – This officially requests the company's closure.

4. Wait for Companies House confirmation – If no objections arise, the company will be struck off the register.

Is a company limited by guarantee right for you?

If you’re running a charity, club, or non-profit and want Limited liability, a professional structure, and a way to reinvest income into your organisation, then a company limited by guarantee is a great choice.

However, if your goal is to make a profit and take dividends, a standard Limited company might be a better fit.

Still unsure? Crunch’s expert team can help you decide and handle the setup. We’ve helped a number of non-for-profit entities get up and running and find financial success, get in touch today! 

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