Limited by Guarantee

Definition: A Company Limited by Guarantee does not usually have a share capital or shareholders, but instead has members who act as guarantors.

At a glance:

The steps you are legally required to follow are outlined in this section including:

STEP ONE

How to apply for a name for your Business.

STEP TWO

How to Draw up a Memorandum of Articles of Association and Statement of Nominal Capital

STEP THREE

How to prepare the details required as Particulars of Directors.

STEP FOUR

How to register for Tax with the Kenya Revenue Authority (KRA)

STEP FIVE

How to register your Company with the Registrar of Companies

STEP SIX

How to apply for a Business Permit

STEP SEVEN

How to register with the National Social Security Fund

STEP EIGHT

How to register with the National Hospital Insurance Fund (NHIF)

Forming a Company Limited by Guarantee is most commonly used as the structure for social enterprise organisations such as Clubs, Non-Governmental Organizations (NGO’s), Charities, Cooperatives & Residential Property Management Companies.

PROS

Advantages of a Company Limited by Guarantee

LIMITED LIABILITY
  • Companies limited by guarantee allow for multiple owners (members) of the company.
  • The company is a separate legal entity from its owners (members) and they are protected by limited liability.
    i.e. The company is responsible for all debts it incurs and not its (members)
ACCESS TO CREDIT
  • Loans are easier to apply for and receive than with other Company structures.
  • The lending financier (bank or investor) can secure the loan against identified assets of the business, as a floating charge.
  • Or the lending financier can secure its loan against the business as a whole, as a fixed charge.
  • If donor funding is sought, the financing institutions may insist on a company limited by guarantee structure.
BUSINESS CONTINUITY
  • A company limited by guarantee is its own legal entity and therefore has permanent succession.
    i.e. The company continues irrespective of changes in named owners (shareholders).
  • By registering your company as a company limited by guarantee, it guarantees business continuity (unlike a in the case of Sole Proprietorship).
PROTECTION OF A COMPANY NAME
  • The choice of a Company Name is restricted
  • For more information on choosing a company name: http://kenyabusinessguide.org/limitedbyshares-step1/
  • Provided your chosen Company Name complies with the rules and is approved & registered correctly, no one else can use the same name.
OWNERSHIP FLEXIBILITY
  • Ownership (shares) may be issued, transferred or sold relatively easily.
  • Existing owners (shareholders) are protected by ‘pre-emption’ rights
    i.e. Existing shareholders have automatic right to the first option to purchase these shares in proportion to their existing share.
  • Owners (shareholders) are also protected by the company legislation which in turn protects the interests of minority investors
BETTER PENSION SCHEMES
  • Approved Company Pension Schemes usually provide better benefits
    i.e. Better than those paid under contracts to self-employed, sole proprietor / sole trading businesses.

CONS

Risks of a Company Limited by Guarantee

LIMITED LIABILITY
  • A company limited by guarantee takes longer to register.
  • The cost of registration & incorporation is higher.
  • Security Clearance is required.
ACCESS TO CREDIT
  • A company limited by guarantee is less attractive to commercial lending institutions as it has no Share Capital Asset Value which can be used as Debt Collateral.

PROS

Company Limited by Shares versus Company Limited by Guarantee

PROS LIMITED BY GUARANTEE
  • A company limited by guarantee takes longer to register.
  • The cost of registration & incorporation is higher.
  • Security Clearance is required.

CONS

Company Limited by Shares versus Company Limited by Guarantee.

CONS LIMITED
  • A company limited by guarantee has no share capital.
  • It is best suited for non-profit organizations.
  • It is less attractive to commercial lending institutions in comparison to a company limited by shares where the shares have an Asset Value.
    i.e. Shares can be traded and sold easily and can be used as Debt Collateral.

KENYA BUSINESS GUIDE

The Kenya Business Guide (KBG) is a think-tank that seeks to support the improvement and strengthening of the business environment in Kenya by providing access to information on key features of both the private and public sector prerequisites in the effective functioning of business. The KBG works in the intersection of the private and public sectors developing curated and value-added information to assist leaders in making more effective decisions.

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