Companies Limited by Shares vs. Limited by Guarantee

Posted on: 2017-09-16 06:56:24

A company limited by shares can be described as an incorporated business structure and is regarded as a legal person or entity, which is held responsible for its own debts. It is the most popular company structure out there and is normally created by people who wish to earn profits from their business ventures. The biggest advantage of such a company is that it can be started by any business irrespective of its size and this includes startups as well. It can be owned by at least one person or more. These owners are also referred to as member or shareholders. In order to become a shareholder you should have at least one share in that particular company.

In these companies the shareholders enjoy a limited amount of liability. In case the business in question becomes insolvent a shareholder would only need to pay the price of his shares. Beyond that the company itself would be held responsible for all the debts incurred by itself. In these companies the shareholders get shares of the profits made by the business. This is proportionate to the amount of shares held by them or the percentage of the same with respect to the total shares offered by the company.

The owners of the company appoint managers in order to look after the daily activities of the company. In most cases the shareholders employ themselves as the directors of such a company.

Differences with companies limited by guarantee

As far as legal definitions are concerned both the companies are one and the same. However, the ownership pattern of these companies is different in the sense that there are no shareholders. In these companies the owners are also referred to as guarantors. They can be called members as well. Anyone can become a guarantor by assuring to provide a certain sum of money to the company in question.

The money guaranteed is the extent to which someone is held liable towards the business. It needs to be paid when a company goes out of business. Here too, directors are appointed by members in order to take care of the everyday affairs of the company and as is the case with most companies limited by shares here too the guarantors themselves become the directors.

Here you can see a close comparison between companies limited by shares and limited by guarantee:

 

Sl. no

Basis of Distinction

Limited by Guarantee

Limited by Shares

1

Definition as per the Companies Act, 2013

“Company Limited by Guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up. [As per Section 2(21)]

“Company Limited by Shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. [As per Section 2(22)].

2

Meaning- Required as to Memorandum

Memorandum states that members shall have limited liability to the extent of the amount that they have guaranteed to pay to the company at the time of its winding up.

Memorandum states that members shall have limited liability to the extent of the amount unpaid, if any, on the shares held by them.

3

Object

They are formed to provide specific services to the public and are non-profit making business. Therefore, it has specific objects & detailed rules pertaining to which areas they want to work upon.

They are formed for profit-making business and have very general objectives and the clauses which allow them to pursue any legal activity or trade.

4

Share Capital

May or may not have share capital

Must have share capital

5

Shareholders

There are no shares – hence there are no shareholders. Instead, the company will have members.

Owners of shares are called shareholders of the company.

6

Company

Companies limited by guarantee are non-profitable organization. They are specially designed for charitable purposes.

Companies limited by shares are profit making organization

7

Examples

Advanced PCB Technologies Private Limited

Reliance Jio Infocomm Limited (RJIL)

 

Which one should you choose?

The decision regarding which form of company you should choose depends on the profit sharing model that you wish to follow. This is always going to be the most logical and straightforward approach that needs to be taken in such cases. If it is a profit-making business that you want you should go for a company that is limited by shares. If you want your company to be a non profit-making one your company should be limited by guarantee. In case, it is not that simple then you need to talk to a professional business consultant or adviser and find out what you should do. You should be able to get proper guidance from them. In this context you should also remember that you cannot change your company from one form to another.