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Company Limited by Shares or Guarantee – What’s the Difference?

We get inundated with the above question. In response, we thought we would share our article again explaining the difference as we feel it is important to understand each structure as it has a drastic effect to the functioning of your company. Sourced from Legal Vision.

Company Limited by Shares

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 result in stimulated 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.

According to the Corporations Act 2001, a company is a legal entity which:

  • can perform all the functions of a body corporate
  • can sue and be sued
  • has perpetual succession
  • can acquire, hold and sell property

A company’s name must indicate its legal status. That is, if it is a proprietary company, then the word ‘Proprietary’ or the abbreviation ‘Pty’ must be included in the name, and if the liability of the company is limited, the word ‘Limited’ or the abbreviation ‘Ltd’ must appear at the end of its name.

The following are the types of company forms most frequently encountered:

Proprietary Limited, or Pty Ltd:  This is by far the most common type of company. It can have no more than 50 non-employee shareholders. It is limited by shares, meaning it is incorporated with a share capital made up of shares taken by each initial member on incorporation. Members are liable only to the extent of any unpaid amounts on their shares. That is, their personal assets are not at risk in the event of the company being wound up. It cannot make share offers to anyone other than existing shareholders or employees of the company or a subsidiary company.

There are large proprietary companies and small proprietary companies. A proprietary company is judged to be large if it satisfies at least two of the following criteria:

  • Annual revenues of  $10 million or more
  • Assets of $5 million or more
  • 50 or more employees

Large proprietary companies are required to lodge their annual accounts with the ASIC. However, companies can often find ways of avoiding this requirement.

Limited, or Ltd:  This is a public company which may or may not be listed on the Australian Stock Exchange. In both cases there is some ownership by the public without the restrictions placed on proprietary companies in regard to share offers. Public companies are required to lodge their annual accounts with the ASIC.

No Liability, or NL:  This is a form of public company created especially for the Australian mining industry. Shareholders with partly paid shares are not bound to pay calls for the unpaid capital, although non-payment of these calls means they forfeit the shares. This type of company may or may not be ASX listed.

There exist a few other company forms. For example, there are proprietary companies that are unlimited, and there are companies that are incorporated by charter of the Queen rather than by registration. These are extremely rare.

Not for Profit

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.

Public Company Limited by Guarantee:

These are registered under the Corporations Act 2001 as a not-for-profit company limited by guarantee.  It is defined as “a company formed on the principle of having liability of its members limited to the respective amounts that the members undertake to contribute to the property of the company if it is wound up”.  The amount of the guarantee is usually between $10 and $100.

There is no restriction on the number of Members that an organisation can have but there must be a minimum of one (1).  Membership cannot be transferred or sold (unlike a proprietary limited company with shareholders) and membership is personal to each member.

Profits of the company are to be reinvested into the company to continue the company’s operations and further the company’s objects.  They may not be paid to members or directors of the company.

In the event of a winding up, the assets of the company must be transferred to another NFP whose objects are similar to those of the present company.

Public perception is that NFPs generally do not or should not have a share structure and accordingly, public companies limited by guarantee are a preferred structure over proprietary limited companies.  The ATO also tend to view the company in a favourable light when considering the NFP position.

The administrative requirements of the company are more onerous then for example an incorporated association but not greatly.  There are costs associated with the governance of the company, such as lodging returns with ASIC and audit requirements based on size.

The basic cost of incorporating a public company limited by guarantee is around $800.

Proprietary Limited Company:

Also incorporated under the Corporations Act 2001.  There is a restriction to the number of members it may attract to it (being 50) and this can sometimes be seen as a disadvantage when dealing with larger scale projects.  In addition, the presence of shareholders and a share structure allows the perception that the profits and dividends of the company are the objectives of the stakeholders themselves.

Administrative requirements are similar to those imposed on a company limited by guarantee under ASIC rules.

Income Tax Exemption:

Not all NFPs are exempt from income tax.  Organisations that are charities must be endorsed by the ATO to be exempt from income tax.  Organisations that are not charities can self-assess their entitlement to income tax exemption, but must meet certain rules and tests to do this.  If the organisation is not exempt from income tax then the rules of mutuality are used to determine tax liabilities.  This relates to splitting the income and costs based on whether they have been derived from members or non-members and taxing accordingly.

While this may be a little dense it is worth the read!