Companies limited by guarantee are a type of registered public company that limits the liability of its members. If the company is wound up, the liability of its members for the debts of the company are “limited” by the guarantee that is usually set out in the company’s constitution. If the company cannot pay off all its debts through its own assets, the members will only be required to contribute up to the amount set out in the constitution. The amount is nominal – for example, members may agree to contribute $10. Additionally, companies limited by guarantee must comply with the requirements in the Corporations Act 2001 (Cth).
Why should you register as a company limited by guarantee?
A company limited by guarantee usually owes obligations to the Australian Securities and Investments Commission (ASIC). The amount of obligations required of the organisation will depend on its size. One example of an obligation would be providing financial and directors reports according to the Corporations Act.
For more detailed information on the obligations that different sizes of companies limited by guarantee owe to ASIC, go here, or have a read of our summary here.
Companies limited by guarantee are usually not-for-profit organisations and charities. A company limited by guarantee that is a not-for-profit organisation may reduce its obligations if it registers with the Australian Charities and Not-for-profits Commission (ACNC). If an organisation does register with the ACNC, the obligations that it would owe to ASIC are now to the ACNC. Like the arrangement with ASIC, the amount of obligations required of the organisation will depend on its size.
If you are starting a not-for-profit organisation, see this article for more information on the choices you have. Not sure if you can register with the ACNC? See their guide here. Even if you cannot register your organisation with the ACNC, if you do not have particular revenue raising concerns, it may still be beneficial to register as a company limited by guarantee.
What are dividends?
Dividends are payments out of the profit of the company that the company can issue to its shareholders. Different companies may have different arrangements as to the amount and regularity of the payment of dividends. Companies pay dividends to attract shareholders. Paying dividends not only gives a monetary incentive to potential investors, but also gives them confidence regarding the health of the company. This contributes towards their confidence in getting a return on their investment. The company then benefits from the increase in cash flow brought on by the increase in investments.
For more information on dividends, see this article.
So can a company limited by guarantee pay dividends?
Companies limited by guarantee are neither able to issue shares nor pay dividends. This limits their revenue raising capability. It is for this reason that most commercial organisations choose to register as companies limited by shares instead. However, as mentioned earlier, companies limited by guarantee may still be suitable for your particular needs.
Not sure what structure would best suit your needs? Speak to a lawyer today.
