Difference between a Company Limited by Shares and Company Limited by Guarantee
Published: September 22, 2023
Read Time: 8 minutes
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.
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:
Company Limited by Guarantee
Company Limited by Shares
Limited to initial amount members agree to pay.
Limited to value of unpaid shares shareholders hold.
Members do not receive dividends. If a company winds up, the surplus assets are distributed to another organisation.
Profits can be distributed to shareholders at any time.
Each member gets one vote when the company makes important decisions.
Multiple classes of shares are issued, each with different voting rights.
Company cannot issue shares to the public.
Company can issue shares as part of its capital. Third party investors can purchase shares. Shareholders can sell or purchase shares.
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.
Can a company convert from a company limited by guarantee to a company limited by shares?
Yes, you can convert your CLG to a CLS if you are in compliance with the legal requirements set out by sections 163 and 164 of Australia’s Corporations Act 2001 (Cth). You will need to apply to ASIC to officially change your company structure and provide a special resolution adopted by your members. You will also be asked to submit a statement signed by directors and confirming your creditors will not be negatively affected. All creditors must be notified of the change and the new registration will be published in the ASIC database and Gazette.
Can company directors be held liable for debts incurred by the company?
In some cases, yes. Since directors are responsible for ensuring the company does not trade while it is insolvent, they need to assess the cash flow and financial position of the company before approving a trade. Not doing due diligence can mean breaching civil or criminal provisions of the Corporations Act. Directors may also be held liable for outstanding tax debt if they have acted illegally. Additionally, if a director acts as a trustee of a trust, they may become liable if the company breaches the terms of the trust deed or they act outside the scope of their powers.
Can shareholders be held liable for company debts or legal troubles?
Members of a limited company are not liable for the debts of the organisation. Their only liability is the amount they agreed to pay the company for shares. However, since some members may also act as company directors, they may become personally liable under specific circumstances if they are found to have acted without doing their due diligence or engaged in criminal activity.
How does the legal structure of my company affect the liability of my members?
The legal structure of a company can not only affect personal liability but also determine the activities owners and founders can conduct and the way the organisation functions. Personal liability rules apply when a business or organisation is unable to pay its debts or is sued by its creditors. Creditors can only go after the assets or property of individual shareholders or members if the organisation is not registered as a separate legal entity. Once you become a company limited by guarantee or company limited by shares you can ensure those who invest in your organisation are not held liable for unpaid debts by maintaining your official status with Australian authorities.
For more information on due diligence and how to deal with misconduct when running a company limited by guarantee, read this ASIC Info Sheet.
This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.
Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.