In today’s economic climate, it is more important than ever to consider and review your potential financial vulnerabilities, both on a personal and professional level. You may not have considered that being a member of a sports or social club or community association could open you up to personal liability for that organisation’s debts.
Now is the time for members of such organisations to be exploring the option of limiting their liability. This is usually done by conversion of the organisation to a company limited by guarantee.
- What is a company limited by guarantee?
- Why would you want to restructure to a company limited by guarantee in a recession?
- What are the benefits of conversion to a company limited by guarantee?
- Next steps
What is a company limited by guarantee?
A company limited by guarantee is an alternative limited liability company without a share capital. In the same way as a club or association, a company limited by guarantee has members rather than shareholders and is typically established for non-profit organisations such as charities, members’ clubs and property management companies.
For more details on the structure of companies limited by guarantee and the types of organisations likely to be established as a company limited by guarantee, please have a read of our article Private Companies Limited By Guarantee.
Why would you want to restructure to a company limited by guarantee in a recession?
Limit the liability of members
The key motive to convert to a company limited by guarantee in a recession is to limit your liability as a member and protect your personal assets. In times of recession, there is a great amount of economic uncertainty and unexpected events such as changes in government policy, businesses changing hands or becoming insolvent and loss of grants or funding could result in your personal assets being unexpectedly put at risk.
In a company limited by guarantee, each member’s liability is limited to the amount they have guaranteed, irrespective of the extent of the company’s debts (except in the case of director wrong doing). The amount guaranteed is typically a nominal amount of £1 per member and is normally documented in the articles of association. It is possible to have different classes of member and for each class to guarantee a different amount if you so wish. Your liability as a member only arises if a contribution is needed to pay the company’s debts on a winding-up. This liability continues for a period of one year after ceasing to be a member of the company.
It is worth noting that the guarantee is separate from any membership or subscription fees of the organisation.
Independent legal entity
A company limited by guarantee is legally separate from its members so is able to enter into leases, commercial contracts and employ staff as a legal person in its own name. This not only enables the organisation to operate more smoothly, but it also limits any personal liability of members under such contracts.
More transparent and effective governance
Many associations will have rules or by-laws which are limited in scope or outdated. Existing documentation (if any) could be open to interpretation or simply not cover certain events which can lead to expensive and time consuming disputes between members. The structure of the organisation may also be unclear and again lead to disagreements and conflict between members. This is particularly relevant in larger organisations, such as trade associations.
Converting to a company limited by guarantee allows you to review and establish a clear structure for the organisation. Putting in place articles of association for the company, allows you to clearly set out the rules of the organisation and cover many fundamental areas such as membership and decision making.
You may include a power in the articles of association for the directors to make or amend rules or by-laws to cover more detailed matters. These could include the rights and classes of members, membership fees and delegation to any further executive or non-executive committees.
Our experienced corporate team would be happy to walk you through such documentation step-by-step.
What are the benefits of conversion to a company limited by guarantee?
- Limited liability - for the debts of the company, if the company becomes insolvent (unless the directors are guilty of any wrong doing)
- Company status - being a limited company can give credibility to the organisation and confidence to partners and members
- Independent legal entity - the company can enter into commercial contracts and employ staff
- Transparent governance and structure – the opportunity to put in place bespoke articles of association and a clear structure which should make the company a lot easier to run and minimise potential costly disputes.
Am I able to convert to a company limited by guarantee?
In order to answer this question, please get in touch with our corporate experts who will be able to advise you on the particular set of facts for your organisation.
In general, a company limited by guarantee cannot have a share capital and must have at least one director and one member (this can be the same person). The directors have the same duties to the company as the directors of share companies – if you would like to find out more about these duties, please see our article Directors Duties: Liabilities & Responsibilities of a Director.
A member of a company limited by guarantee must be a legal and/or natural person. This means that when restructuring an organisation, another company may become a member of a company limited by guarantee unless the articles prevent it.
If you do decide to go ahead and convert to a company limited by guarantee, you should first review any rules or by-laws of your organisation to ensure the decision to convert is taken in accordance with these rules.
Can a company limited by guarantee be wound up?
Yes - the procedure for winding up a private company limited by guarantee is the same as that for a company limited by shares, although it can be trickier to arrange meetings to pass the necessary resolutions to wind up the company as there are often a large number of members.
All members have an equal vote, unless otherwise set out in the articles, and a 75% majority in attendance at the necessary meeting is required.
Limiting your liability in times of recession is critical. If you would like to know whether conversion to a company limited by guarantee could achieve this for you and your organisation, please get in touch with our corporate solicitors who will be happy to discuss the options available for your specific needs and walk you through the conversion process.