When establishing your non-profit organisation, you have several legal structure options to choose from, including an incorporated or unincorporated association, a cooperative, a charitable trust, or a company limited by guarantee (CLG). As a founder, the choice you make will determine the types of activities you can legally carry out. An organisation’s legal structure will inform the way reports and registration requirements are determined and regulated by government bodies and must be made clear during the registration process.
What is a company limited by guarantee
The term ‘company limited by guarantee’ refers to a specialised entity formed by a non-profit organisation and designed to limit financial liability.. The Australian government makes a distinction between small companies limited by guarantee, medium-sized companies with an annual revenue of less than $1 million, and larger companies with a revenue of $1 million or more. The size of the company will determine the financial reporting requirements.
In Australia, companies limited by guarantee are subject to the [Corporations Act 2001 (Cth)]1 and administered by the Australian Securities and Investments Commission (ASIC) 2 . Like incorporated associations, this legal structure designates an organisation as a separate legal entity. A limited by guarantee company (CLG) can be sued, legally lease a property, enter into contracts or hold assets in its name. The members of a CLG must specify the financial amount they are willing to contribute to the property of the company on its winding up and this will determine or limit the liability of the company’s members.
The Corporations Act 2001 recognises an entity as a ‘small company limited by guarantee’ if they remain so for the entire financial year, there are no deductible gift recipients, and the annual revenue is less than $250,000. The Australian Securities and Investments Commission (ASIC) adds that “Commonwealth companies or subsidiaries, subsidiaries of Commonwealth authorities, transferring financial institutions, building and credit societies, and credit unions are excluded from some of the obligations imposed on companies limited by guarantee.
Company limited by guarantee minimum requirements
In terms of governance, a limited by guarantee company must have at least three directors and one secretary on its Board, register a minimum of one member, be internally managed by a constitution or replaceable rules. Companies limited by guarantee must also meet several record-keeping obligations. This includes keeping a record of all Directors and members, recording any Board meeting minutes, and keeping track of resolutions made during these meetings. Annual general meetings are open to all members should also be held once per calendar year and within five months of the end of each fiscal year.
Like other public companies, an Australian public company limited by guarantee (CLG) has many legal obligations and financial reporting rules to follow. These largely relate to three things:
Conducting regular financial reporting,
Arranging for reviews of financial reports, and
Sharing annual reports with members.
ASIC states that CLGs must appoint a registered company auditor within a month of registering, keep up-to-date financial records, prepare, submit, and have audited regular financial statements and reports each fiscal year, and send copies of the documents to all members 3. Occasionally, a member may arrange not to receive statements.
There are also a few restrictions. For example, a CLG cannot pay dividends to its members if it has been registered on or after June 28, 2010. The Australian public company limited by guarantee may not change its office holders, address, legal name, or constitution without lodging a notice with authorities.
Benefits of a company limited by guarantee
One of the key advantages of this legal form is that it allows the organisation to operate nationwide. The strict legal requirements of this structure might also provide potential donors, clients and business partners with confidence that the organisation is run according to stringent principles and acknowledged standards. Indeed, some types of organisations are required to have this structure by law. This legal structure is not one that should be entered into lightly, however, as its legal and administrational obligations are significant and may be too much of a burden to an organisation with limited resources.
Members of companies limited by guarantee (CLGs) enjoy more transparency when it comes to knowing what goes financially. They have the right to access financial and director reports, meeting minutes, and a copy of the company’s register of members. This form of organisation allow makes it easier to operate on a larger scale and provides more assurance to stakeholders such as business partners, donors, or clients. Each CLG can operate under its own standards and principles, as long as it meets the legal requirements.
Unless specifically requested by Investments Commission, ASIC, a small CLG is not required to “prepare a financial report or have it audited, prepare a directors’ report or notify members of annual reports”4. Different restrictions apply to companies limited by guarantee that do not fit into this category, and those with revenue of $1 million or more.
Company limited by guarantee vs shares: how is a CLG different?
The main difference between a company limited by guarantee and a limited share company is that shareholders have less liability on shares is limited to the amount that members guarantee. Members also may not receive dividends and are usually more involved in the company's objectives rather than for financial gain. The balance sheet also varies slightly between the two types of entities. The company limited by guarantee will use the heading 'reserves' rather than 'shareholders funds'. Companies may also choose to disclose the guarantees in the notes section, mentioning the liability amount member are subject to.
What are examples of companies limited by guarantee?
In Australia the typical type of organisations that use the CLG structure are clubs, charities, not-for-profits and other community organisations which may range from large to small in size. This structure is more commonly used by larger organisations. Company limited by guarantee examples include some of Australia's best-known charities: RSPCA Australia, Cancer Council Australia, Beyond Blue, Lifeline Australia, Make-A-Wish Australia, Ronald McDonald House Charities and National Breast Cancer Foundation. All of these organisations previously used the Incorporated Association structure and moved to the company limited by guarantee structure as they grew. YouGov Australia 2022 Charity Rankings state that nine out of the top ten organisations in the country use the CLG Structure.
Are there any disadvantages to registering a company limited by guarantee?
Companies limited by guarantee are considered not-for-profit organisations, which means members will likely not make a profit from the activities. There may be more fees associated with setting up this type of company and obtaining the status can be a lengthier process. There are also more administrative and regulatory compliance requirements, and restrictions when it comes to trading. Activities must align with the pursuit of the company's objectives and mission. As well, charities are restricted from campaigning for political parties. With this type of company, Board directors tend to have increased duties. As of June 30th, 2021, association members are subject to a fine of up to $8,007 if they engage in insolvent trading.
Who can audit a company limited by guarantee?
Because a company limited by guarantee in Australia is subject to the Corporations Act 2001 (Cth) there are guidelines around who can audit its accounts. This is dictated by which of the three financial tiers the organisation falls under. If the organisation has annual revenue of $1million or more it is considered a tier 3 entity and its audit must be undertaken by a registered company auditor. If it has annual revenue of less than $1 million, then it is a tier 2 entity and can choose to have the audit completed or to hire a chartered accountant to conduct a review. The accountant must be registered as a member of CPA Australia, Chartered Accountants Australia and New Zealand, or the Institute of Public Accountants. If the organisation has annual revenue of less than $250,000 it is not required to report, audit or review financial activities unless requested to do so by the Australian Securities and Investments Commission.
What if my company is already registered under another structure? Can I switch to a company limited by guarantee?
The structure you choose should be the best fit for your organisation and its members. When making the decision to switch, you should consider the legal, financial, and tax considerations and how they will impact the work you do. A company structure should facilitate your activities, not complicate them. If your organisation has grown significantly, it may be time to consider switching to a company with a limited guarantee. You should consult a licensed legal practitioner before taking any action. We suggest holding a Board meeting and reviewing your constitution before making any decisions about your organisational structure
This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.
Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.