How Shelf Companies Lost Their Appeal and What to Do Now
Also known as a ready-made company or an off-the-shelf company, a shelf company is a pre-registered business you can buy and customise.
Key Highlights
- Similar regulatory requirements apply to companies limited by guarantee (CLG) and companies limited by shares (CLS). However, an incorporated CLG must also comply with additional requirements the Charity Commission sets.
- A CLG suits non-profit organisations, charities, and social enterprises. It provides a robust framework for operating as a non-profit entity, offering significant tax advantages and enhanced capacity to attract funding.
- CLGs can distribute profits unless their articles explicitly forbid it, highlighting the critical role of governing documents in defining their capabilities.
What is a company limited by guarantee?
A CLG is a type of company structure where the owners, known as guarantors, agree to contribute a predetermined amount of money to the company if it faces financial difficulties.
It is particularly suitable for non-profit organisations, charities, and social enterprises, as it allows them to operate without sharing capital. Subscribers do not receive dividends or profits; surplus income is reinvested to further the organisation’s objectives.
Insight
CLGs, unless their articles explicitly allow it, are prohibited from distributing profits. This flexibility is often seen in profit-oriented CLGs such as property management companies. Depending on their operational goals and legal provisions, these companies can distribute profits among their members or reinvest them into the company.
What is a company limited by a guarantee with charitable status?
A Company Limited by Guarantee with charitable status is a company officially registered with Companies House and incorporated by the Charity Commission. This dual registration allows the organisation to benefit from limited liability, reduced tax obligations and enhanced credibility.
Warning
A company limited by guarantee must promote social good. As such, they reinvest all profits into their philanthropic activities to maintain their philanthropic standing and benefits. Distributing profits to members or using funds for non-profit objectives can lead to the loss of tax benefits and harm the organisation’s reputation and fundraising ability.
However, the primary disadvantage is that the company must meet dual reporting requirements and comply with company and charity law regulations.
See also: What Is a Limited Company and How to Register With Companies House
What should the Memorandum and Articles of Association for a Company Limited by Guarantee (CLG) include?
All limited companies, including CLGs, must have a constitution. The memorandum should confirm that the guarantors have agreed to form the CLG. At the same time, the articles should outline the company’s operational framework, including aspects like profit distribution and governance procedures.
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What is the role of a guarantor in a limited company?
A company guarantor is an individual or corporate body that agrees to pay a guaranteed amount, typically nominal (ranging from £1 to £10), if the company cannot fulfil its debt obligations. This financial commitment becomes due when the company is wound up and unable to settle its liabilities.
Additional responsibilities of a member of a company limited by guarantee include:
- Establishing the company.
- Setting strategic objectives for the organisation.
- Appointing and dismissing directors, as well as defining their authority.
Do directors/ guarantors take a share of the profits in a CLG?
Typically, CLGs cannot issue shares, so members cannot take profits in the conventional sense. If members are interested in direct profit sharing, a structure like an ordinary private company limited by shares is more suitable. This approach avoids the need for complex accounting manoeuvres to pay directors.
However, if you are forming a company limited by guarantee to apply for grants, it is possible to compensate directors. Ensure that your constitution allows for payments to directors, either by covering their operational costs or through market-rate remuneration. Discussing the compensation framework with your grant providers to ensure alignment is also essential. As long as directors hold strategic roles within the organisation and effectively contribute their time and expertise, such payments are typically justifiable.
In a property management CLG context, arranging compensation for subscribers and directors can be more challenging and might require careful financial planning to ensure fairness and tax efficiency. Even though there are no shares in the company, making profit sharing impossible, directors can still be compensated in other ways, including:
- Reimbursing costs related to their activities.
- Paying salaries or remuneration subject to Pay As You Earn (PAYE) regulations.
- Issuing loans to directors, which are regulated under benefits-in-kind rules in the Companies Act.
Again, it’s crucial that the governing documents explicitly allow for these forms of compensation to ensure compliance with legal and regulatory requirements.
Warning
Before registering your CLG, clearly define your goals and determine if this company structure is suitable. Collaborating with a company governance expert is highly recommended. They can help you explore various scenarios and draft Articles of Association that accurately reflect your objectives, ensuring your CLG is set up for success
Are there special company name rules to consider while forming a company limited by guarantee?
No, CLG naming rules are identical to private company naming rules. Use our free company name availability checker to see if your chosen name is suitable.
What are the different types of not-for-profit organisations?
Limited by guarantee, companies have no shareholders and are typically formed to benefit others rather than their members. Depending on the organisation’s objectives, there are several types of CLGs:
- Charity Company aims to advance social good. It is registered with the Registrar of Companies and incorporated by the Charity Commission. This dual registration grants charitable standing and significant tax benefits, making it attractive to donors and grant providers.
- A Right-to-Manage Company is registered with the Registrar as a private company limited by guarantee by leaseholders to manage and maintain their building. In this setup, leaseholders take on property management tasks, including setting and collecting service charges from all residents, to benefit all residents involved.
- A Property Management Company’s primary focus is managing properties for the benefit of property owners. The entity is registered with Companies House by investors, real estate developers, owners or as a private CLG. It is responsible for handling the day-to-day operations and maintenance of properties on behalf of the owners.
- Standard Company Limited by Guarantee can have varied objectives, is registered with the Registrar and offers limited liability protection without requiring share capital.
- Community Interest Companies (CICs) are registered with Companies House using paper forms and require approval from the Office of the Regulator of Community Interest Companies. They provide a flexible structure for profit-oriented businesses pursuing social objectives. The primary benefit of a CIC is the “asset lock,” which ensures that the company’s assets and profits are dedicated to community interest purposes. This feature makes CICs attractive to investors and grant providers interested in supporting social impact initiatives.
What are the primary differences between a Right to Manage and Property Management Companies?
The primary differences between right-to-manage (RTM) companies and property management companies are their objectives, membership, and operational focus.
| Difference | RTM | Property Management |
|---|---|---|
| Objective | Established to allow leaseholders (tenants) take over the management of their building from the landlord. This includes responsibilities such as maintenance, service charge collection, and ensuring compliance with lease agreements. | Registered to manage properties on behalf of owners, investors, or developers. Their objectives are broader and include tenant, maintenance, financial, and risk management. |
| Membership | It is limited to property leaseholders. All qualifying tenants are entitled to become members, and their liability is typically limited to a nominal amount, such as £1. | Membership structure of a property management company can vary widely to include property owners, investors, or other stakeholders. Unlike RTM companies, members of property management companies may have financial interests beyond leaseholding, such as investment returns and property value appreciation. |
| Formation and legal basis | Registered with Companies House under the Commonhold and Leasehold Act, 2002. | Registered with Companies House as a CLG or CLS under the Companies Act and required to be part of a goverment approved redress scheme. |
| Profit distribution | Typically structured as not-for-profit entities, any surplus income is reinvested back into the company or used for purposes specified in the articles of association, such as property improvements or community events. | Even if registered as CLGs, these companies have more flexibility in profit distribution. Depending on their articles of association and objectives, they can reinvest surplus income or distribute profits among their members, allowing the entity to align with their financial interests. |
What is the difference between a company limited by shares (CLS) and a company limited by guarantee (CLG)?
The differences between a CLS and a CLG lie primarily in their purpose, tax treatment, and operational structure. A CLS is a profit-making enterprise suitable for businesses where profit distribution and return on investment are key objectives.
On the other hand, a CLG is primarily a non-profit enterprise, often established for educational or community purposes. This makes it an ideal structure for organisations whose primary goal is to serve a public good or community interest rather than to generate profit for distribution.
| Issue | Guarantee Companies | Limited by Shares |
|---|---|---|
| Legal entity | Both are separate legal entities from their members (guarantors or shareholders) with limited liability protection. | |
| Purpose | It is commonly used by charities, clubs, associations, and other organisations where profits are reinvested into the company’s objectives rather than distributed to members. | For profit-making businesses where profits are distributed among the members. |
| Membership rights | The company’s members do not have ownership rights but have voting rights on critical issues. | Shareholders have ownership rights and voting rights proportional to their shareholding. |
| Director | Must have at least one director and one guarantor or member. The director can also be the guarantor. | Must have at least one director and one shareholder. The director can also be the stockholder |
| Company Secretary | Not required to appoint a company secretary. | Not required to appoint a company secretary unless a public ltd. |
| Share capital | Does not have a share capital, issue shares or owners | Has share capital and owners with the ultimate control over the company. |
| Profits distribution | Profits are reinvested into the company’s objectives | Profits are distributed among shareholders |
| Regulation | Typically subject to regulations specific to non-profits, including reporting requirements for non-profit organisations | Subject to general corporate regulations, including financial reporting and investor meetings |
| Reporting requirements | Required to file confirmation statements (formerly, annual return) and annual accounts with Companies House and a Corporation Tax Return (CT600) with HMRC. They must file financial statements with the Charity Commission if incorporated as a charity. | Required to file confirmation statements and annual accounts with Companies House and Corporation Tax Return (CT600) with HMRC. |
| If inactive, both should file dormant company accounts with Companies House. | ||
| Funding | Often relies on grants, donations, and membership fees | Typically funded through share issuance, retained earnings or business loans and grants. |
| Winding up | Subscriber’s liability is limited to the amount guaranteed | Shareowner’s liability is limited to the value of their shares |
What is the difference between a shareholder and a guarantor?
The difference between a company owner and a CLG subscriber primarily lies in the company structure they are associated with and their respective roles. The primary purpose of the CLG member is to provide a nominal guarantee amount, which can remain unpaid until the business is wound up and needs to settle its debts. Guarantors are not entitled to profit distributions, as any surplus a CLG generates is typically reinvested into the company’s objectives.
On the other hand, an investor owns a private company limited by shares. Shareholders are entitled to dividends and profit distributions. They provide share capital, which is used to fund business activities. While the shares can remain unpaid until the business is wound up, the company can call for unpaid shares and take action against shareholders if necessary.
Unlike guarantors, owners have a direct financial stake in the company’s success and profitability.
How do I set up a limited company by guarantee?
Setting up a Company Limited by Guarantee (CLG) is straightforward. However, depending on how busy Companies House is and how you provide the required information, it can take up to 3 working days.
Here’s what you need to get started:
| Requirement | Description |
|---|---|
| Company Name | Choose a unique name for your company that complies with naming regulations. |
| Director and Guarantor | Appoint at least one director and one subscriber. The same individual can fulfil both roles. |
| Registered Office Address | Provide a physical address in the UK where state agencies send statutory correspondence. |
| Registered Email Address | Supply an official email address for communication with regulatory bodies |
| Director’s Service Address | This can be the same as the registered office address, but it is where regulatory bodies contact the director. |
| Governing Documents | Prepare the governing documents, including a memorandum of association and articles |
| SIC Code | Select a Standard Industrial Classification (SIC) code that best describes your company’s primary business activities. |
Why would I register a company limited by guarantee without share capital?
Registering a company limited by guarantee is an excellent option if you want to set up a flat management company, a right-to-manage company, or pursue charitable objectives. It’s also ideal for membership organisations where profits are reinvested to fund organisational goals rather than distributed as dividends to members.
Excellent article! These company limited tips will be helpful for my own financial services UK business.