What Is a Guarantee Company?
A guarantee company is a special type of corporation tailored to safeguard its members from liability. These entities are typically created when non-profit organizations, clubs, sports associations, student unions, workers’ co-operatives, and social enterprises seek to gain corporate structure and protections. Membership-based organizations, which include NGOs among others, often use guarantee companies.
Generally, a guarantee company does not distribute profits among its members or split its assets into shares. Members contribute a predetermined amount of money to join, an amount that may differ based on the size and type (public or private) of the guarantee company. Directors can be appointed within a guarantee company, and they may earn salaries or bonuses according to the company’s agreements.
Key Takeaways
- Guarantee companies provide limited liability protection to their members.
- They are a popular choice for property management firms aiming to shield against certain legal claims.
- Commonly found in the United Kingdom, this structure is typical in England, Ireland, Scotland, and Wales.
How a Guarantee Company Works
Guarantee companies are prevalent in the UK and frequently formed to protect the assets of non-profit organizations, unions, and other membership-driven entities. Despite often including the term “limited” in their names, they can sometimes be exempt from this requirement. Property management companies often choose this structure for holding interests in properties divided into units.
To incorporate a guarantee company, at least one director and one member are necessary, akin to traditional corporations limited by shares. Remaining funds from member contributions are typically used in accordance with the company’s purpose, such as maintaining public service projects or funding museums.
Notably, guarantee companies offer limited liability to their members, providing legal protection in cases of transaction failures. Each member’s financial liability is limited to a nominal amount specified in the company’s articles, usually around £1 but adjustable as needed. Without shareholders reaping profits, members collectively face responsibility for paying off creditors if the company faces dissolution.
Example of a Guarantee Company
A compelling illustration of a guarantee company is Cricket Australia, the national governing body for cricket in Australia. Officially named Cricket Australia (Company Limited by Guarantee), it includes six member associations: Cricket New South Wales, Queensland Cricket, South Australian Cricket Association, Cricket Tasmania, Cricket Victoria, and Western Australian Cricket Association. The organization operates under nine independent directors.
Under Cricket Australia’s constitution, each member’s liability is capped at $1,000. The administrative body handles all gate and signage revenue from international matches and distributes funds to states based on a minimum financial guarantee model. This model mitigates risk from fluctuating revenues caused by match schedules, weather unpredictability, and other external factors.
Related Terms: corporation, limited liability, non-profit organization, directors, public or private companies, membership organizations
