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Company Limited By Guarantee And Company Limited By Shares: Which One's For You?

The Latin root of "company" is "Com- with or together; panis- bread," and it originally referred to a group of people who shared meals. In the unhurried past, merchants held business discussions at beaming parties. The company type of organization has grown significantly in prominence in recent years. They establish a corporation when they establish their business relationships. A corporation or firm is a group of like-minded people who have come together to conduct a business or enterprise. According to the law, a business is a legal entity with a status and personality distinct from those of its members.

It is referred to as a corporate body because the individuals that make it up are united into one body by legal incorporation and conferring of legal identity. The Latin term corpus, which means body, is where the word corporation comes from. A corporation is a legal entity produced through a method other than natural birth. As a legal entity, a corporation has many of the same rights and obligations as a natural person.

Special acts of Parliament or company law gave rise to an incorporated corporation. Through specific acts of Parliament, public corporations like the Life Insurance Corporation of India, SBI, and others have come into existence.

The company legislation of 1956, which was replaced by the company law of 2013, was used to establish businesses like Tata Steel Ltd and Reliance Industries Ltd. A company is defined as one that has been incorporated under the Companies Act of 2013 (Act No. 18 of 2013) or any prior company law (section 2(20)). According to common law, a company is a legal person or entity that exists independently of its members and canto endure beyond their deaths. Instead, a company is a formal means of achieving social and economic demands.

Moreover, a company is a voluntary organization organized for profit and has limited liability, a distinct corporate identity, a common seal, and perpetual succession. Its capital is divided into transferable shares.

Companies may be incorporated with either limited or unlimited liability. Companies may choose to list themselves or not. Unlisted companies cannot be listed under BSE and NSE. They may also be incorporated as private or public companies.

A limited liability business can be further broken down into the three categories below:

  1. Companies limited by shares
  2. Companies limited by guarantee.
  3. Companies limited by guarantee having a share capital.
     

Companies limited by guarantee:

Section 2 (21) of the companies act 2013 defines the "company limited by guarantee".

"A company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up."

According to the Companies Act, the company limited by guarantee has no share capital. Guarantors, who are referred to as Members, are the people that formed this company. Additionally, the business is handled differently under the law by its owners. Both companies are one and the same in terms of legal definitions. However, these businesses' ownership structure is unique in that there are no shareholders.

The owners of these businesses are additionally referred to as guarantors. They may also be referred to as members. By promising to give the corporation in issue a specific amount of money, anyone can sign on as a guarantee. The business's liability level is determined by the amount of money guaranteed. It has to be paid when a business shuts down. To manage the company's day-to-day operations, directors are chosen by the members in this instance. And just like in most companies limited by shares, the guarantors also take on the director role.

Ex: Advanced PCB Technologies Private Limited
The most common legal structure for non-profit organizations, charitable societies, clubs, and other groups is a company limited by guarantee. These businesses are non-profit organizations since the revenues are not dispersed to the shareholders but are reinvested in the business or put to other uses. The articles for these companies typically need to be written primarily for that organization. Therefore, this is a task that requires specialization.

Company limited by shares:

Section 2 (22) of the Companies Act 2013 defines a company limited by shares.

"a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them."

A corporation limited by shares is viewed as a legal person or entity accountable for its own debts and can be characterized as an established business structure. It is the most often used corporate form and is typically developed by those who want to profit from their commercial endeavors. The primary benefit of such a firm is that it can be founded by any business, regardless of size, even startups. One or more individuals may own it. Members or shareholders are other names for these owners. To become a shareholder, you must own at least one share in that specific company.

The stockholders in these corporations are only partially liable. A shareholder would only be required to pay the cost of his shares if the company goes bankrupt. Beyond that, the business would be accountable for all its accrued obligations. Shares of the company's profits are distributed to shareholders in these businesses.

This is based on the number of shares they own or their share of the total number of shares the company is offering, whichever is greater. The company's owners choose managers to oversee the business's day-to-day operations. Most often, the directors of such a firm are the shareholders themselves.

The shareholder has no further obligations once his shares have been paid in full. However, in the event of partially paid shares, the unpaid half is payable whenever the business is still in existence on a call being made, regardless of whether the firm is still operating or is being wound up. These businesses are highly prevalent in the business, trading, and industrial worlds. Such corporations have an authorized share capital of a specific dollar amount, and each member's duty is only for the shares and premiums, if any, he owns that are still owed.

Ex: Reliance Jio Infocomm Limited (RJIL).

Which one is for you?
Depending on the profit-sharing model you want, you must decide which legal structure for your business. This will always be the most sensible and obvious course of action that needs to be followed in such circumstances. You should choose a corporation limited by shares to run a profitable business. Your company should be limited by guarantee if you want it to be a non-profit organization.

Why should one opt for a company limited by guarantee?

Similar to why a for-profit firm founds a company limited by shares, there are similar reasons why a non-profit organization or community project is established in the form of a company limited by guarantee. When a charity or community project is organized as a corporation limited by guarantee, the people in charge are protected from being held personally accountable for any obligations.
  • Limited liability:
    If a community project, charity, or non-profit endeavor is not established as a limited corporation, its administrators´┐Żfor instance, the managing committee´┐Żmay be held personally accountable for any outstanding debts. Because certain community groups may be institutions whose responsibilities can't be readily eliminated, there could be a significant risk. For instance, they could have leasehold properties or financial agreements for equipment. It can become insolvent if there is insufficient income to cover these expenses, and the persons in charge may face difficulties due to unanticipated events.
     
  • In contrast to a business limited by shares, this one has members, not shareholders. Members make up a business limited by guarantee.

Why should one opt for a company limited by shares?
  • Limited liability:
    The company's shareholders will only be held responsible for the debt that the company incurs up to the amount of their investment, and no more. This is one of the main benefits of operating a firm as a limited corporation. Owners' personal finances and assets are safeguarded even if the firm encounters financial difficulties. Limited liability becomes crucial for businesses seeking to offer high-value services that may result in claims and obligations in the public domain.
     
  • A stakeholder in such a corporation is better positioned because dividend income from the shares is tax-free. Additionally, because limited firms only pay taxes on their profits, they are not subject to the higher tax rates often imposed on sole proprietors or partnerships.
     
  • An individual can raise money and protect their brand by selling shares to others through a corporation limited by shares.

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