When it comes to starting your company, there are a lot of decisions to make. Firstly, you need to decide what structure your business will take. However, after this, you also need to choose whether your company will be limited by shares – or limited by guarantee.

In this guide, we’ll explain the difference between companies that are limited by shares and limited by guarantee.

Liability

Liability is one of the foundational pillars of company law. Companies usually have limited liability, meaning that the people ‘behind’ these companies are not personally responsible for the company’s losses.

You can register one of two types of companies under the Corporations Act 2001 (Cth). These are proprietary companies and public companies. Each has a varying degree of liability and distribute stock differently. Both are also ‘limited’ either by shares or by guarantee. In this article. we’ll explain how they’re different.

Companies Limited By Shares

Companies limited by shares are the most common type of company in Australia. This is because it is available to all companies, and offers limited liability. A company limited by shares can be a private or public company. Companies limited by shares end with the word “limited”, which conveys that a company has limited liability. In this sense, your liability as a shareholder is limited by the value of your shares. If you are yet to pay for these, then you will be liable to pay it back.

Example

Sarah has purchased some shares in her friend’s new company, W&A Designs. She gets a percentage of ownership in the company. Sarah holds 500 shares, which come at a price of $1.50 each. If the company is wound up, then she will have to repay her shares. If she pays this amount before, then she will have no liability. <

Moreover, the rights and obligations of individuals can be in proportion with an individual’s investment. For shareholders, they have limited liability, and an obligation to pay the company for the shares they have taken in it. In contrast, the directors are not liable for the company’s debts. In fact, they only become personally liable if they breach their directors’ duties or legal obligations, or participate in activities that cause the company to suffer loss. For example, wrongful or fraudulent trading.

An advantage of choosing a limited liability company is if the company has financial difficulties, the personal assets of members are not at risk, and its debts do not become the debts of its shareholders.

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Companies Limited By Guarantee

Unlike a company limited by shares, a company limited by guarantee has members and not shareholders. This limits the liability of members to a fixed amount which is the guarantee fixed by the company’s constitution. The guarantee is usually requested if the company is wound up. If this occurs and the company does not have sufficient assets, each present member has an obligation to contribute an amount. If the present members cannot satisfy the guarantee, then past members (excluding past members that ceased to be members) must contribute.

Ultimately, a company limited by guarantee is mainly for not-for-profit companies. It’s not common to provide a guarantee in the company’s constitution because if capital needs to change, members cannot increase or decrease the guarantee.

However, you can convert your company from one limited by guarantee into a company limited by shares. To do this, you have to comply with the requirements in ss 163 and 164 of the Corporations Act 2001. But this no easy task. If you need help with setting up a company, you can contact one of our business lawyers for advice.

Conclusion

Overall, it is extremely important you understand the two categories of company structures before you register your company. Knowing what degree of liability you’ll have is a must. This will also help you plan how you’re going to run your business in the future.

Don’t know where to start? Contact one of our consultants on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Fiona Lu

Fiona is a Paralegal working in our content team which aims to provide free legal guides to facilitate public access to legal resources. With an interest in information, media, consumer and employment law, her primary focus is on how technology will affect the future of the legal industry.