When setting up a social venture in the UK, you can choose from a variety of legal structures – the most popular being a company, and specifically a private limited company. But how do you decide between a private company limited by shares or one limited by guarantee? Chris Willis Pickup and Emma Millar from Mishcon de Reya's Charities and Social Venture team outline the two types of private limited companies and highlight the key factors that could influence your choice.
The similarities
The two types of private limited company share many similarities. For example:
- Directors. Both types of company are run by their directors, whose legal duties are essentially the same for both types of company.
- Owners. Both types of company have ‘owners’, though they are usually called different things (shareholders or members). In both cases, the owners ultimately control the company, and the owners can be different to the directors.
- Legal personality. Both are ‘incorporated’ and have ‘legal personality’; i.e. they exist as a legal entity, separate from their owners and directors. They enter into contracts, open bank accounts, own property and take on debts in their own name – not in the names of their owners and directors.
- Limited liability. Both have ‘limited liability’. They are responsible for their own debts and obligations, for which their owners are not generally responsible.
- Company registration. Both are incorporated (i.e. created) and, in the UK, registered by Companies House in basically the same way and for the same cost. They also both appear on the public Register of Companies, showing essentially the same information.
The differences
There are a few specific legal differences between the two types of private company:
- Control. Companies limited by guarantee have members, rather than shareholders. They have no shares at all, so you can’t own shares in a company limited by guarantee. Ownership and control of the company is generally split equally between the members.
- Name. Companies limited by shares must always use the word ‘limited’ in their legal name. Companies limited by guarantee can drop the ‘limited’ if they meet certain social venture-type criteria. Only companies limited by guarantee can use the word ‘Foundation’ in their name if they meet specific criteria.
- Profit. Companies limited by shares are most commonly used where their owners (including any investors) want to make a profit, whilst companies limited by guarantee are mostly non-profit, including charities. In fact, both types of company are allowed to generate profits for their owners, and both can be set up on a non-profit or limited-profit basis. But it’s helpful to know how they are generally perceived.
More specific factors
- External investment. As your venture grows you may hope to receive impact investment from investors, who will generally expect to receive shares in your company in return. This generally means that being a company limited by guarantee is a barrier to receiving external investment.
- Distributing profits. Receiving some or all of the profits from your business is usually much simpler if your company is limited by shares, rather than by guarantee.
- Allocating control rights. Companies limited by guarantee are appropriate where you have a group of people or organisations, and you want them all to have an equal stake. It is possible to create ‘classes’ of membership with different rights and benefits, but quite complicated legally. If you want founders or investors to have different sized stakes in the company – e.g. 60% founder(s), 40% investor(s) – it’s legally much simpler with a company limited by shares.
- Grant funding. Companies limited by guarantee are generally better for grant funding. This isn’t for any particular legal reason, but because grant funders – particularly charities – often feel more comfortable providing grant funding to a company limited by guarantee, since they see them as non-profits. Some charitable grant funders make it a condition that a company receiving a grant must be limited by guarantee. This is less of an issue with public sector grants or more sophisticated grant funders.
- Conversion to charity status. Almost all charitable companies are limited by guarantee rather than limited by shares. While it’s easier to convert a company limited by guarantee into a charity, it’s not impossible to do this with a company limited by shares.
Mishcon de Reya's specialist social venture lawyers Chris Willis Pickup, Emma Millar and Kieran John are waiting to discuss your ideas, including setting up a social venture. We offer free 30-minute consultations for social ventures through our virtual pop-up service.