People use the term company in a way that suggests there is only one type. In fact, there are different kinds of companies and structures – public or proprietary, no liability companies or unlimited with share capital. Below, we explain the difference between a company limited by shares vs guarantee.
Company Limited By Shares
A company limited by shares is one of the most popular commercial vehicles used in Australia today. It refers to a company in which the liability of its members is limited to the amount (if any) unpaid on the shares held by them.
These companies, therefore, provide shareholders with limited liability. Similarly, the directors of a company limited by shares are also not liable for the debts of the company. They become personally liable only if they engage in activities that are contrary to their office and their legal obligations.
The limited liability of these companies means that the personal assets of members are not at risk when they invest in the company. If the company experiences financial difficulties, its debts do not typically become the debts of the shareholders. Limited liability provides investors certainty and security and can resultingly stimulate investment.
A company limited by shares can be either a public or a proprietary (private) company. A proprietary company can have no more than fifty non-employee shareholders. It has a restricted right to transfer shares and cannot undertake any commercial activities (except in limited circumstances) that would require disclosure under Section 6D of the Corporations Act 2001 (Cth) (the Act). Therefore, they cannot issue securities such as shares, debentures or units.
Proprietary companies can be large or small. The difference between small and large proprietary companies depends on their assets and revenue as well as the number of entities that the company controls. Small proprietary companies have less reporting requirements than larger and public companies.
A public company is typically bigger than a proprietary company. It can issue securities in itself to the public and have greater disclosure and reporting requirements than its proprietary counterpart. They do not usually have a limit on the permissible number of shareholders and have an unrestricted right to transfer shares.
All companies limited by shares, whether proprietary or public, must include the term ‘limited’ in their name to alert potential creditors that the company has limited liability.
Company Limited By Guarantee
A company limited by guarantee limits its members’ liability to the amount that each has undertaken to contribute to the business’ property if, and when, it is wound up. A guarantee is a fixed amount. The company constitution typically details all guarantees.
As the definition suggests, members need only pay their guarantee where the business ends. If the company ends with liabilities greater than the total amount of their member guarantees, the members are not required to pay any more than their guarantee. This type of company can only be public.
A company limited by guarantee cannot issue shares. Its members also do not receive dividends from profits. This sort of company has no share capital and is unable to raise equity. For this reason, businesses rarely use it. Rather, they are common among recreational and sporting clubs and in the not for profit or charity sector. Their inability to raise capital is relatively unproblematic in this context because these kinds of companies have limited needs for capital. These are usually satisfied through fundraisers, grants or with membership fees.
If a company limited by guarantee is small, it does not need to prepare an annual financial report or a director’s report. A company limited by guarantee is small if it meets certain revenue thresholds and is not a type of organisation listed in the Act. However, a member with 5% of votes can request them in writing, and the Australian Securities and Investment Commission can direct a company to prepare them.
If the members created the company for a non-commercial aim and its income furthers that purpose, they need not include the word ‘limited’ in its name.
If you have any questions or need assistance setting up a company whether public or proprietary, limited by shares or guarantee, get in touch with our business structure experts on 1300 544 755.