Company Limited by Shares vs Limited by Guarantee: Key Differences Explained

Limited by Shares and Limited by Guarantee are two common types of company structures. Here’s how they differ:

Nature of Ownership and Purpose

• Limited by Shares: These companies are owned by shareholders. Shareholders own a portion of the company through their shares and have voting rights based on the number of shares they own. Primarily formed for profit-making purposes. The profits are distributed among shareholders as dividends based on the number of shares they hold.
• Limited by Guarantee: These companies have members rather than shareholders. The members do not own the company but act as guarantors, agreeing to contribute a certain amount to the company’s assets if it is wound up. Typically used by non-profit organizations, charities, clubs, or associations. These companies are not set up to make profits for distribution but to reinvest any surplus into the organization’s objectives.

Liability and capital structure

• Limited by Shares: The liability of shareholders is limited to the unpaid amount, if any, on their shares. If the company is wound up, shareholders only lose the value of their shares. These companies issue shares that represent ownership. Shareholders provide capital to the company by buying shares.
• Limited by Guarantee: Members’ liability is limited to the amount they agree to contribute in the event of the company being wound up, which is usually a nominal sum like £1 or a similar small amount. There are no shares issued in this structure. Instead, the company relies on donations, membership fees, or other non-share capital to fund its activities.

Profits and Surpluses

• Limited by Shares: Profits can be distributed among shareholders in the form of dividends.
• Limited by Guarantee: Profits are generally not distributed to members. Instead, any surplus is used to further the company’s goals.

Use Cases

• Limited by Shares: Commonly used by businesses seeking to make profits, raise capital by selling shares, and operate commercially.
• Limited by Guarantee: Suitable for non-profits, charities, clubs, and social enterprises where profit distribution is not the main focus.

Summary of Key Differences