Difference between Company Limited by Guarantee and Company Limited by Shares

The liability of a company is limited to the amount its members have invested or guaranteed to the company. Such liability can be limited either by shares held by the members or by guarantee undertaken by them. The liability of a company can also be unlimited, making the members personally liable for the company’s debts.

The Companies Act of 2013 defines a company as an organisation incorporated under the provisions of the Act, or any other previous related Acts. A company is an association of persons, who contribute money that constitutes the Company’s capital. Such associated people are called members, and the money that they contribute is called the common stock – share capital. The proportion of the member’s contribution is entitled in shares.

Company Incorporation

Private and Public Companies

A company can either be a private or public company. The significant difference between the two is that, in a public company, the shares can be traded in the market. The stocks of a public company are listed in a stock exchange. On the other hand, in a private company, the shares are held by a close-knit group of members. A private company can become public after an IPO issue of shares.

More: Difference between private and public limited company

Liability of a Company

When a company is incorporated under the Companies Act, it can either be incorporated as a limited or an unlimited company. The difference between the two is in the burden of the company's liability on the members/owners in the event of debt or losses. In a limited company, the liability of the members is limited to the shares they hold. However, in an unlimited company, there is typically no share capital, and the owner/members/directors of the company are personally liable for all the debts of the company.

Broadly speaking, a limited company can fall under any of the following heads:

  1. Limited by Shares
  2. Limited by Guarantee

Also Read: Types of Companies in India

Company Limited by Shares

  • Most commercial or for-profit organisations usually follow such a type of structure.
  • The company receives its funding from the contribution of the members, that in-turn, constitutes the share capital of the company.
  • The liability of the members is limited to the value of unpaid shares held by them (if any).
  • Therefore, they cannot be held personally liable to pay more than the value of their shares.
  • In case the shares are fully paid-up, then the members have nothing more to pay. In the case of unpaid or partly paid stocks, the member could be called to pay up the shares at any point of the company’s existence.
  • Usually, a dividend is paid to the members of such company in proportion to the number of shares held by them, and such dividend is paid out of the company’s profits.

Example: Most private and public are limited by shares and its the most popular form of business in India. Companies like Reliance, Infosys and Tata are all public companies limited by shares. Facebook and Google operate in India with shares, however, they have been incorporated as private entities. 

Advantages Companies Limited by shares 

  • Transfer of shares and holdings 
  • No tax on profits of the shareholder
  • Limited Liability of the owners 
  • Shares boot value of the company

Companies Limited by Guarantee

  • Most non-profit organisations and charitable societies follow this pattern, as the owners don’t seek to gain money from the operations of the company.
  • The profits earned in such companies are retained and redirected for the operation of the company, or invested elsewhere.
  • Such companies may or may not have a share capital, but, in most cases, companies limited by guarantee have no shareholders or share capital.
  • These companies usually receive their initial funding through government grants, endowments, subscription, donations, etc, which removes the reason for allotting shares of the company.

Example: Open Source Pharma Foundation is a private limited company which is limited by guarantee 

Concept of Guarantee

However, the owners of the company undertake a nominal amount as their minimum guarantee, which they will pay in the event of debt, winding-up or dissolution. They are called guarantors of the company, and they usually elect to become the directors of the company as well. Since guarantee limits the company's liability, the owners/founders are not personally held liable for the debts of the company, if any, apart from the amount of the guarantee undertaken by them.

If the initial funding comes from the funds of the owners, it would constitute the share capital of the company. In such a case, the liability of the owners has a two-fold effect. Their liability will be limited to both the guarantee amount specified by them and a portion of their unpaid shares.

Advantages Companies Limited by Guarantee

  • Limited Liability 
  • Members are not shareholders, so no holdings in the company. 
  • Tax benefits under the law: section 8 companies have separate tax benefits.
  • Increased credibility amongst donors and government authorities.  

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