When establishing a company, choosing the right structure is crucial to its operations and legal obligations. Two common types of company structures are companies limited by shares and companies limited by guarantee. In this article, we will outline and explain 11 important differences between these two types of companies to help you make an informed decision when setting up your business.
Amongst the many types of companies, we will be looking a companies limited by shares and the ones limited by guarantee. In a nutshell, a company Limited by shares are Companies registered with nominal share capital and shareholders who subscribe to the company shares and are entitled to dividend, also, they are liable to the extent of the shares held by the individual shareholders while the ones Limited by guarantee are does not have shares or shareholders but guarantors who guarantee to pay a certain amount in offsetting the Company’s debt in the event of winding up.
Differences Between Companies Limited By Shares and Companies Limited By Guarantee
1. PROCESS OF REGISTRATION: The mode of registrating a company, whether it is limited by shares or by guarantee seem to be thesame in that the promoters or founding members follow the due process under the relevant law which is the Company and Allied Matters Act to register the company with the Corporate Affairs Commission (CAC).
A Company limited by shares are usually registered through a simple process of application for name reservation with the CAC after which the registration documents would be lodged and approved by the commission. On the other hand, for a company limited by guarantee, the process is more complex in that the applicants are expected to file an application with the Attorney General of the Federation and await his approval. Such approval becomes very sacrosanct in the formation of a company limited by guarantee.
2. APPROVAL: For a company to by duly formed, it must obtain certain approval or authorization from the relevant agencies or bodies of government. In the case of companies limited by shares, the approval necessary is that if the corporate affairs commission which is usually consequent upon the founders application for registration.
On the part of companies limited by guarantee, the founders must have to obtain the approval of the commission in addition to that if the Attorney General of the Federation.
3. MEMORANDUM: The memorandum of Association of a company or proposed company is a document that outlines important aspects of the company’s operations including the number of person’s forming the Company, the type of company being formed, the objects of the company and others. To that effect, according to the provisions of CAMA, the formation of a company limited by shares is targeted at profiteering and that is usually contained in it’s objects where it states the kind of business it could carry on and the number of share capital it is to be established with.
On the other hand, Companies limited by guarantee are not allowed to engage in profit yielding ventures or operate with a share capital. It is not allowed to divest any of it’s properties or state in it’s article of Association that any of it’s members will be entitled to such dividend from the Company’s operations.
4. PROFIT: One of the core reason for opening or setting up a company is to run businesses on commercial basis and earn profit which would be declared by the company and shared as dividend to it’s shareholders. While this is the focal foundation for the establishment of companies limited by shares, this is not the case with Companies limited by guarantee.
They are set up for the promotion of social infrastructure and structures in the society, providing humanitarian services like furthering the course of education and others. It is not a profit making Company and barred from many one.
5. DEFINITION: Having defined what a company is, it suffices to state that one of the major difference between a company limited by shares and that limited by guarantee is that while the Company limited by shares is one established with a certain number of members, it is mandatory to have a nominal share capital and the liabilities of the members are to the extent of shares held by each member in the event if winding up.
When it has to do with a company limited by guarantee, the members liabilities are to the extent of their undertaking and guarantee, ie, to the extent they agreed to contribute in the event that the company is winding up.
6. SHARES: Shares is the right of a member of a company calculated in monetary terms. Every company limited by shares must be established with a share capital and the amount of share capital it has is dependent on the type of limited company it is (except limited by guarantee). Each member must have at least one shares with the company and that shares entitled the holders to certain rights and obligations through the time the company is being operational to the time of winding up.
On the other hand, a company limited by guarantee doesn’t have shares as the law does not permit it to have one so, the members are not shareholders and in the event if winding up, they only contribute the portion they had guranteed to contribute And nothing more.
7. DIVIDEND: Every Company limited by shares must have shareholders who are entitled to the company’s dividend. Dividend is the amount of profit accrued to a shares within a certain period of time when declared.
The shareholders are set of investors who had pulled their resources in certain individual proportion to establish the company and such amount of shares entitles them to a certain ratio of dividend. Dividend is only accrued to shareholders in a company limited by shares, it is not so with companies limited by guarantee as there are no shareholders and so, dividends are not accrued.
8. SHAREHOLDERS: The establishment of any Company is usually done by certain individuals and run by a set of investors and managers. In the case of companies limited by shares, the company is being run by the shareholders. The shareholders are usually categorized in many cases or say, classified.
There are quite a number of classes if shareholders like the founders or differed shareholders, the preference shareholders and the ordinary shareholders each of which carries a special entitlement. On the other hand, Companies limited by guarantee are usually run or made up of guarantors who guarantee the operations of the company and agree to contribute a certain amount in the event of winding up.
9. LIMITATION: The operation of every company is subject to certain rules and regulations otherwise known as limitations under the Company and Allied Matters Act. In terms of companies limited by shares, the limitations ranges from the objects of the company According to Section 27 of the Act that prohibits the incorporation of a company for the purpose of carrying on illegal businesses to the number and class of person’s allowed to form such company.
This is quite different in a slight way as the companies limited by guarantee are equally not allowed to carry on illicit activities but to promote humanitarian services however, there are no specific class of person’s allowed to operate a Company limited by guarantee.
10. Special Privileges: One of the very important distinguishing factor between a company limited by shares and one Limited by guarantee is that, they both enjoy certain privileges as a result of their status. While a company Limited by guarantee enjoys certain tax exemption as well as impediments and strict restrictions imposed on other set of companies, a company limited by shares enjoys a separate set of privileges.
Though it enjoys legal protection as a legal person, it is not exempted from tax. While it’s members enjoy certain financial benefits from realized profits, companies limited by guarantee are not entitled to such benefit.
11. The determinant of the degree of influence: Ownership of shares in a limited liability company determines the members’ degree of interest and influence in the company. In other words, the higher the number of shares owned by an individual, the greater the influence he has in the company. This is because voting rights in a company limited by shares is basically according to the unit of share owned.
The higher the shares of an individual, the greater weight or percentage his vote carries. On the other hand, for a company limited by guarantee, the determinant of influence may include the amount an individual undertook to pay in the event of winding up. However, the degree of influence and rights are basically determined by the memorandum and the articles of association of the company.
In a subtle conclusion, companies limited by shares are known as the commercial companies and more prevalent than the companies that are limited by guarantee which are mostly Non-governmental Organizations (NGOs).