February 27, 2021

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Meaning of Company Limited by Guarantee and Key Explanations

Meaning of Company Limited by Guarantee and Key Explanations
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Establishing businesses is not complete without examining charity and religious entities. These types of organisations are not seen as business because their primary goal isn’t that of profit. Therefore, they are seen as Non-governmental organisations (NGOs) or nonprofits businesses. If establishing this type of business is your goal, then a company limited by guarantee should be formed.

Definition of Limited by Guarantee Company

According to section 26 of the Company and Allied Matters Act (CAMA) 2020 of the Federal Republic of Nigeria, this is a company “formed for the promotion of commerce, art, science, religion, sports, culture, education, research, charity or other similar objects, and the income and property of the company are to be applied solely towards the promotion of its objects and no portion thereof is to be paid or transferred directly or indirectly to the members of the company except as permitted by this Act.”

This company can simply be defined as a one whose members liabilities are limited to the amount contributed and guaranteed by them.

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Key Explanations

The purpose for forming the business must be solely for promoting commerce, art, science, religion, sports, culture, education, research and charity. The term promoting suggests they assist these sections of the economy without the aim of making profit. For example, nonprofit microfinance institutions provide loans to support or promote commerce by providing microloans. However, their aim is never to earn profit.

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Educational activities provided by the Institute of Chartered Accountant of Nigeria (ICAN), for example, is not established for profit. Religious organisations do not have profit-motive; so are sports, research and charity entities.

Other Objects. The definition provided by CAMA 2020 also mentioned the phrase “other similar object.” These suggest other kinds of entities that are not profit oriented or that is similar to the aforementioned.

Profit Motive. The main motive of NGOs are the provision of essential and community services to the society they serve. Profit is therefore out of place. Although funds are contributed by members, the major goal is the service rendered. For example, sport organisations focus on entertaining viewers with sporting activities such as football, relay, hockey, basketball, Golf, among others.

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Distribution of income. Distribution of income is not allowed as a result of its nonprofit motive. If in any year, the entity earns profits from its activities. The income cannot be distributed to member unless it is permitted under the Act. The income earn is retained by the NGO for growth and development.

Limited Liabilities. The liabilities of members is limited to the amount contributed or guaranteed by members of the nonprofit. Therefore, if the NGO faces financial challenges, the members loss only the amount each of them had guaranteed.

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Features of a Company Limited by Guarantee

Board of trustee. A limited by guarantee company has their board members called; Board of Trustees. This is different from profit making entities whose members are called board of directors.

Stakeholders. Those who have interest in this type of organisation are called guarantors, members or stakeholders.

Liabilities. The liabilities of members are limited to the amount that was subscribed by each of the guarantors. According to the CAMA 2020, each member is liable to pay a minimum of 100,000 Naira in the event of winding up of the entity.

Accumulated surplus. The surplus earned every year is accumulated and added to the amount subscribed by its members. This fund is used for growth and development of the nonprofit. In addition, the entity is not allowed to distribute this income among members. Any attempt to do so is void. And penalties are attached to it. Only certain companies limited by guarantee allowed by the Act can distribute income to stakeholders.

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Conclusion

Companies limited by guarantee are mostly nonprofits and nongovernmental organisations. Members of this type of company contribute funds as subscriptions. And may loss their subscription when the entity liquidates or could not pay its debts as they pan out.

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