Company limited by guarantee

Posted by: Australian Centre for Philanthropy and Nonprofit Studies
Queensland University of Technology

Although we often think of a ‘company’ as being a business, a company limited by guarantee is a special form of public company that can be used by nonprofit groups. It is a legal structure created by Commonwealth law (the Corporations Act 2001), and is available for use by groups throughout Australia. It uses a company structure with ‘directors’, but has ‘members’ instead of ‘shareholders’.  Some of the provisions of the Corporations Act 2001 (e.g. directors’ duties and penalties) that apply to ‘for-profit’ companies (i.e. businesses) also apply to companies limited by guarantee.

The government body responsible for regulating companies limited by guarantee is the Australian Securities and Investments Commission (ASIC).   You can go to their website at: http://www.asic.gov.au

This following information is intended as a guide only, and is not legal advice.  We acknowledge the work of PILCH which is a Victorian based nonprofit that promotes law in the public interest. PILCH through their website  www.pilch.org.au/community_org assist nonprofits with information sheets on legal matters and we acknowledge their work and information in compiling this fact sheet.

If you or your organisation has a specific legal issue, you should seek legal advice before making a decision about what to do.

This page looks at:

  • What is a company limited by guarantee?
  • What are companies limited by guarantee most commonly used for?
  • How do we set up a company limited by guarantee?
  • Related Resources

What is a company limited by guarantee?

A company limited by guarantee is a public company which is formed for purposes beneficial to the community and which prohibits payment of dividends to its members.  See information on what is a special purpose company above.

A company limited by guarantee needs to comply with the laws in the Corporations Act that apply to public companies. Companies limited by guarantee must include the words 'Limited' or 'Ltd' after their name (unless they are eligible for an exemption from this requirement).

Limited by guarantee means that the members guarantee to pay a fixed but small amount of money in the event of the liquidation of the company. The members agree in writing (known as a ‘guarantee’) to pay a nominal amount (usually $20 - $100) to the property of the company. If the company is wound up, the liability of the members is limited to the nominal amount that they have guaranteed. 

Advantages of a company limited by guarantee include:

  • creating a legal entity separate from its members
  • all the other advantages of an incorporated association and
  • the ability to carry-on business outside of Queensland as a company's registration isrecognised Australia-wide.

Disadvantages of a company limited by guarantee include:

  • it's more expensive to register than an incorporated association
  • compliance with the requirements of the Corporations Act is more expensive and onerous than compliance with the Associations Act.

What are companies limited by guarantee most commonly used for?

A company limited by guarantee may be a suitable structure for nonprofit organisations wanting to operate nationally or in more than one State or Territory and which have the resources to comply with the Act. Often larger nonprofits, including those that only operate in one State, will use this structure. Some legislation requires this structure for certain types of organisations (eg. registered housing and aged care providers).

A company limited by guarantee is also suitable for a wholly owned subsidiary organisation, as it can be set up with just one member.

How do we set up a company limited by guarantee?

Information about how to register a company can be found on the ASIC website http://www.asic.gov.au

It is recommended that your organisation seek professional help from a lawyer, accountant, qualified company secretary or some other professional with experience setting up not-for-profit companies.

Initially, your organisation may also need someone with experience to advise you on the requirements for running a company limited by guarantee. This is not only because the law in this area is quite detailed, but also because the penalties that ASIC imposes for non-compliance with the law are quite significant.

It is worth getting some professional advice at the start, on issues such as:

  • the drafting of a constitution with  
    • an objects clause, non-profit and winding up clause and relevant funding clauses that will comply with the requirements for taxation and other concessions available to notfor-profit companies
    • provisions about the eligibility, election and removal or directors
    • provisions about voting rights and proxies
  • Information and applicability of the Corporations Act provisions known as 'replaceable rules' which can be used to govern a company instead of a constitution. See ASIC fact sheet http://www.asic.gov.au/asic/asic.nsf/byheadline/Constitution+and+Replace... whether your company may be a special purpose company and under the Corporations(Review Fees) Regulations 2003 (Cth) eligible for reduced ASIC fees;
  • whether your company is able to apply for an exemption from having to have the word 'Limited' in its name. ( Note to apply for this exemption you must have a constitution)

What names can and can't be chosen

You can only choose a company name that is not already registered to a company or business. Also there is a list of words that you cannot use without special approval.

You can search the National Names Index at www.search.asic.gov.au  This index lists all Australian company and business names. You can also use our Identical Names Checkfacility to check whether your proposed name is identical to another name already registered. A search of company and business names can also be carried out at any ASIC Service Centre.

Certain words and phrases cannot be used in company names without the approval of a specified Minister or Government agency, for example words such as 'building society', 'trust', 'university', 'chamber of commerce' and 'chartered', as well as words suggesting a misleading connection with Government, the 'Royal Family' or an ex-servicemen's organisation. These restrictions make sure that a company's name does not mislead people about its activities. This list is in Schedule 6 of the Corporation Regulations. ASIC may refuse to register certain names if they are offensive or suggestive of illegal activity. You may also need to consider if your proposed name is similar or identical to any registered or pending trademarks. Check the IP Australia website to find out.
The Australian Taxation Office (ATO) has specific clauses which the constitution of a 'nonprofit company' (generally public companies) must contain to be eligible for tax concessions.

The ATO can give you more details including examples of the clauses required. Getting good professional advice at the outset could save your organisation a lot of time, cost, administrative headaches (and possible legal issues) further down the track. 

Useful resources

Corporations Act 2001 (Cth) http://www.comlaw.gov.au/ComLaw/Legislation/ActCompilation1.nsf/0/CA1F0F9868473141CA256FB9002CA4B2/$file/Corps2001Vol1WD02.pdf

This is the legislation that governs the setting up and running of a company limited by guarantee (as well as other types of companies)
Corporations Regulations (various) http://www.comlaw.gov.au/ComLaw/Legislation/LegislativeInstrumentCompila...
00D13A25CEB0177CA257185000447B7/$file/Corporations+2001Vol5.pdf

There are a number of Corporations Regulations covering various topics- scroll down this page to 'Corporations' for links to each set of Regulations
Related links - the Australian Securities and Investments Commission (ASIC) information ASIC Homepage  http://www.asic.gov.au

This is a link to ASIC's homepage - information about setting up can be found in the 'For Companies' section although much of this information has been written for different types of companies (like private, for profit companies).

Registering not-for-profit and charitable organisations.

This ASIC overview page provides an outline of the requirements for setting up a company limited by guarantee.
www.asic.gov.au/asic/asic.nsf/byheadline/Registering+not-for-profit+or+charitable+organisations?openDocument

Special purpose companies

This ASIC overview page provides an outline of the requirements for setting up a company limited by guarantee as a special purpose company (to get reduced fees). http://www.asic.gov.au/asic/asic.nsf/byheadline/Special+purpose+companie...

Registrable Australian Bodies
This ASIC page provides basic information on what is required to register an incorporated asssociation under the Corporations Act. http://www.asic.gov.au/asic/asic.nsf/byheadline/Registrable+Australian+B...

How to register a company
http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Starting%20a%20company%2...

This ASIC page provides basic information on the process for registering a company. It is not specifically written for not-for-profit companies.