What Is a Guarantee Company?
I'm here to explain what a guarantee company is—it's a type of corporation set up to protect its members from liability. You see these forming when non-profit organizations want corporate status. Think clubs, sports associations, students' unions, and other membership organizations, plus workers' co-operatives, social enterprises, and NGOs—they all might go this route.
In a guarantee company, you won't find profits being distributed to members or assets divided into shares. Instead, members pay a specific sum to join, and that amount can differ based on the member, the company's size, and if it's public or private. Directors can be appointed, and they're allowed to take a salary or bonus as agreed with the company.
Key Takeaways
- Guarantee companies are organized to provide limited liability to their members.
- Many property management companies choose to become guarantee companies to shield themselves from certain legal claims.
- This form of company is most commonly found in England, Ireland, Scotland, and Wales.
How a Guarantee Company Works
You find guarantee companies commonly in the United Kingdom, often formed to protect the assets of non-profit organizations, unions, and membership organizations. They usually include the word “limited” in their name, though they might be exempt from that. Property management companies also favor this structure, especially when they're created to hold interests in property divided into units.
To incorporate, you need at least one director and one member, much like a traditional corporation limited by shares. If there are funds left from member contributions, they're typically used for the company's purpose, such as funding a museum or other public service projects.
What sets guarantee companies apart is their limited liability feature. Members get legal protection from failed transactions, but if the company dissolves, each member is on the hook for a nominal sum. This amount is outlined in the company's articles—it's often £1, but you can set it to whatever fits the situation.
Important
Keep this in mind: since a guarantee company has no shareholders getting profits, all members are equally responsible for paying creditors if the company goes under.
Example of a Guarantee Company
Take Cricket Australia as an example—it's the central administrative body for cricket in Australia, fully named Cricket Australia (Company Limited by Guarantee). It has six member associations: Cricket New South Wales, Queensland Cricket, South Australian Cricket Association, Cricket Tasmania, Cricket Victoria, and Western Australian Cricket Association, plus nine independent directors.
According to its constitution, each member's liability is limited to $1,000. Cricket Australia collects all gate and signage revenue from international matches and distributes it to the states under a minimum guarantee financial model. This setup protects the states from fluctuations in gate revenue due to match timing, duration, weather, or other factors.
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