Difference between a Company Limited by Shares and Company Limited by Guarantee

What are the key differences between a company limited by shares and a company limited by guarantee? Is one better than the other? Under Australian law, there are two main types of company structures: proprietary companies and public companies. A closer look reveals that these businesses usually operate either as companies limited by shares (CLS) or companies limited by guarantee (CLG). The difference between the CLG vs CLS structure is primarily in the ways each approaches liability, voting and dividend rights, and share distribution.

The best structure for your group will depend on your organisational purpose and the activities you plan to conduct. Both businesses and not-for-profit organisations have the option to become either a company limited by guarantee, or a company limited by shares. Choosing either of these structures offers its own advantages and limits.

Company limited by shares (CLS)

The company limited by shares (CLS) legal structure has become the most used in Australia. A CLS is a legal entity that offers shareholders limited risk on the financial investments they make in the company. Both public and private Australian businesses can use this organisational structure. A limited company operating with shares is normally one of two types of companies: 1) a private entity listed on the stock exchange (also called proprietary company), or 2) a public entity, either listed or unlisted.

The structure offers incentives to encourage individuals and companies to invest in the organisation. For example, if a growing web design company sells 50 shares to an investor at $30 each, the new shareholder will receive a percentage of ownership in the company in exchange for their investment. They will also receive voting and dividend rights in proportion to the amount invested in the business. In this scenario, the investor has no liability for any debts the organisation incurs during its operation if the shares have been paid in full. However, if the money had not been paid before the company winds up, the investor will be liable for $1,500.

For a more in-depth explanation of this legal structure, read this Better Boards fact sheet.

Company limited by guarantee (CLG)

A company limited by guarantee (CLG) is a membership-based entity in comparison to a company limited by shares which deals with shareholders. A CLG is a public entity that offers limited liability to its members and holds a separate legal identity as an organisation. This structure uses a constitution to govern and manage its operations. A limited company by guarantee can only pay its members a guaranteed amount at the time when operations are winding up.

The company limited by guarantee structure is often used by charities, non-profit organisations, cultural clubs, sports clubs, and bowling clubs. A CLG may require its members to agree in writing (guarantee) a small amount between $10 and $100 to the company. For instance, if a newly incorporated cricket association grows its membership by 500 members, they may be asked to each contribute a one-time amount of $10. In exchange, members will receive voting rights but will not be entitled to dividends if a profit is made from the organisation’s activities. Companies limited by guarantee as less common than companies limited by shares but may still be a good option of your organisation is not planning to grow.

To read more about the company limited by guarantee structure, see Better Board’s fact sheet.

CLS vs CLG differences

The key differences between company limited by shares vs company limited by guarantee structures concern the way they offer liability protection to their members or shareholders. The table below highlights these differences and how each company deals with these issues:

Both company structures offer limited liability, however, CLG members are only liable for the amount they agree to pay when they join the organisation. Members of a public company limited by shares are also liable for the value of unpaid shares they hold if the company winds up. A CLS has more flexibility when it comes to selling and buying shares and shareholders receive different rights based on their class shares. With a company limited by guarantee, the amount members pay is determined by the constitution and every member has the right to vote.

CLS vs CLG Advantages and Limits

Companies limited by shares

The key advantages of choosing a company limited by shares structure is that in the event that your organisation has financial problems and is unable to pay its debts, you won’t risk your individual shareholders’ assets. A CLS is a separate legal entity, which means individual share owners are not personally liable and the organisation can enter into legal agreements on its own. This structure allows companies that want to grow to attract investors to sell more shares. The structure is popular because of its flexibility.

The main limitation of having a company limited by shares is that if your assets are insufficient for covering any debts at the time of winding up operations, your shareholders may be expected to contribute financially and cover the amount.

Companies limited by guarantee

The key advantages to forming a company limited by guarantee is that founders planning to conduct non-profit or charitable activities get more control over how their assets are managed and see more stability in their membership. CLGs are unable to issue shares and there is little risk that someone will gain controlling interest by selling or buying a portion of the company. A companies limited by guarantee is a separate legal entity, meaning its members aren’t personally liable if the organisation is unable to pay its debts. During the winding up process, a CLG will only ask its members to repay the guaranteed amount they already contributed.

There are a few limits to forming a company limited by guarantee. The company will not be able to pay dividends to members or distribute profits. Instead, the money will be re-invested to fund ongoing activities. Shares cannot be issued to new investors and the company is likely to see limited financial growth as a result. Public companies limited by guarantee are governed by a constitution and cannot replace rules without voting on and approving amendments, which can slow decision making.

Additional Resources

For more information on due diligence and how to deal with misconduct when running a company limited by guarantee, read this ASIC Info Sheet.

From Inc to Ltd: Making the change to Company Limited by Guarantee

Fulfilling Your Obligations as a Not-for-profit Director

The Gardener or the Lawyer? Who to Call First When Making Governance Change in NFPs