Learning Curve…

MBA – PM0051 : Distinguish between companies limited by shares and companies limited by guarantee.

Posted on: March 15, 2012

MBA – PM0051 : Distinguish between companies limited by shares and companies limited by guarantee.

Answer: – When you want to start a business, there are several ways to structure a company. The different formations refer to different tax and profit sharing methods. Two of these formations that are more popular in Britain and Ireland are Companies Limited by Shares and Companies Limited by Guarantee.  Potential business owners often find them confusing and do not know which one they should use. There are similarities and differences between the two.

Company Limited by Guarantee

A company limited by guarantee is not as common as a company limited by share, but it is the more popular of the two. It is mainly used when setting up a non-profit business. Instead of having shareholders, this company has members. The company is formed for the sole purpose of providing a service to the public.

There are specific clauses associated with the organization that determine the manner and the areas in which they can operate. For example, businesses that exist for the purpose of charity have specific restrictions about the donations they receive so that donors know exactly how the money is being spent. Because of this companies limited by guarantee find it easier to raise money because they can show the donors how they plan to use the money.

These companies do not have any share capital. The members pledge to donate a set amount of money at the start of the organization or per year. This is the case with such companies limited by guarantee as schools, churches, clubs, etc., when the initial money is needed to purchase property and erect a building.

Company Limited by Shares

A company limited by shares is an ordinary business in which the owners want to make a profit. Therefore there are shareholders and the clauses in their guiding statements that give them the liberty to engage in all kinds of activities that let them make a profit provided that these activities are legal.

Similarities

Both companies limited by shares and companies limited by guarantee have a similar structure. Each one has a director, a secretary and a declarant at the time of the business startup.

Summary

Companies limited by shares are the most popular form of business.

Companies limited by guarantee are non-profit organizations, but companies limited by shares are those designed to make a profit.

Companies limited by guarantee have members and companies limited by shares have shareholders.

Companies limited by guarantee so not have share capital and have regulations that require them to show donors how they plan to use the money that they raise.

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