Limited by Shares vs Limited by Guarantee: Choosing the Right Company Structure for Your Business

When you’re gearing up to launch a new venture or reorganise your existing business, you’ll quickly discover how important it is to get the legal structure of your company right from day one. If you’re researching company structures, two popular UK company types probably keep popping up: companies limited by shares and companies limited by guarantee.

But what’s the difference between limited by shares vs limited by guarantee-and, more importantly, which structure is right for your business goals? Don’t stress - with a little guidance and some tailored legal advice, you’ll be set up for success and fully protected as you grow.

In this clear, practical guide, we’ll break down the main differences between limited by shares and limited by guarantee, explain their pros and cons, and show you how to choose the best structure for your business. If you’re unsure, keep reading for the essential info you need before registering your company in the UK.

What Does 'Limited by Shares' Mean?

Most UK companies are set up as companies limited by shares. This is the classic structure you’ll see for the overwhelming majority of ordinary commercial businesses-whether that’s a tech startup in London, a busy café, or an online retailer.

Here’s what you need to know about this structure:

• Ownership: The company is owned by shareholders. These can be individuals or other companies.
• Liability: Each shareholder’s liability is “limited” to the amount unpaid on their shares. In other words, shareholders can only lose what they’ve invested if the business faces debts or claims-not their personal assets.
• Purpose: Typically, companies limited by shares are set up to make a profit, which can be distributed to shareholders as dividends.
• Suitable for: Startups, growth businesses, family-run companies, most commercial ventures.

To form this type of company, you’ll need to issue at least one share and have at least one shareholder and one director (these can be the same person). If you’re planning to bring in investors or attract co-founders, a limited by shares company is usually the best option. Read more about company structures here.

What Does 'Limited by Guarantee' Mean?

Companies limited by guarantee operate differently. Instead of shareholders, you have “guarantors”-people who promise to pay a set amount (usually very small, say £1 or £10) if the company is wound up or faces debts. This structure is recommended when profit isn’t the main aim of the business.

• Ownership: There are no shares or shareholders. Ownership/control is via “members” (guarantors), who are usually directors or those involved in running the business or organisation.
• Liability: Members’ liability is limited to the guaranteed amount they agree to (usually nominal).
• Purpose: Companies limited by guarantee are often “not-for-profit” and do not distribute profits to members. Any profits made are generally reinvested to achieve the organisation’s objectives.
• Suitable for: Charities, social enterprises, clubs, associations, and trade bodies.

This structure is commonly used for organisations that want limited liability protection without having shareholders or distributing profits. Find out more about setting up a non-profit or charity here.

Limited by Shares vs Limited by Guarantee: What’s the Real Difference?

The main “limited by shares vs limited by guarantee” question comes down to your business’s aims and how you intend to distribute (or not distribute) profits.

Feature	Limited by Shares	Limited by Guarantee
Ownership	Shareholders (own shares in business)	Guarantors (no shares, but membership)
Profit Distribution	Profits can be paid out as dividends	Profits are usually reinvested, not distributed
Common Uses	Trading businesses, startups, investment vehicles	Charities, clubs, property management, social impact organisations
Attracting Investment	Easy-shares for founders/investors	Not suitable for outside investment
Legal Requirement	At least one share issued; share capital	No share capital; guarantee amount per member
Regulation	Companies Act 2006	Companies Act 2006; often further regulated as a charity

The key thing is that “limited by guarantee vs limited by shares” isn’t about which is “better” overall-it’s about which matches your aims, funding sources, and what you want to do with profit.

Pros and Cons of Each Structure

Advantages of a Company Limited by Shares

• Can issue shares to attract outside investment or bring in co-founders
• Well-understood, familiar structure for most businesses and banks
• Allows for flexible profit sharing and eventual sale of the business
• Clear, simple ownership structure (shares determine control and voting power)
• Easier to transfer ownership (buy/sell shares)

Disadvantages of a Company Limited by Shares

• Shareholders expect returns; pressure to prioritise profits
• Not suitable for non-profit or social organisations aiming not to distribute profits
• More complex reporting and Companies House filings compared to sole trader/partnership

Advantages of a Company Limited by Guarantee

• Great for running a non-profit or social enterprise with limited liability
• No shareholders demanding dividends or profit payouts
• Signal to donors or funders that profits will be reinvested in your cause
• Legal “separation” between organisation and individuals for debts/liabilities
• Helpful structure for applying for charitable status

Disadvantages of a Company Limited by Guarantee

• Unsuitable for attracting outside investors-no shares to issue
• Generally cannot distribute profits to members
• Still requires company reporting and filing (like a limited company)
• Can be confusing for would-be “owners”-no shares to buy or sell

For a deeper dive into the ins and outs, see our guide to companies limited by guarantee and our company limited liability explainer.

When Should You Choose a Company Limited by Shares?

Most people starting a trading business, tech startup, consultancy, retail shop or similar will want a company limited by shares. This is because:

• You want to make a profit and (potentially) pay yourself or others dividends
• You may want to attract investors, co-founders, or sell shares in the future
• Clear rules around ownership, control, and succession planning
• Common path for growing and selling businesses later down the track

Setting up a limited by shares company is straightforward: you register the company at Companies House, allocate shares, appoint at least one director and shareholder, and define your company’s Articles of Association (the rules for how your company will be run).

If the business is going to change hands, attract investment, or needs a defined ownership structure, this is usually the best route. For more, check out our guide to picking the right company structure for growth.

When Is a Company Limited by Guarantee the Right Choice?

If your organisation’s main goal is charitable, community, or social impact-rather than making a profit for owners-a company limited by guarantee makes sense. You should consider this structure if:

• You’re starting a charity, community group, club, society, or similar cause
• You do not want to pay profits out to anyone-funds are reinvested to meet your objectives
• Outside investors aren’t needed and funding will come via donations, grants, or membership
• You want limited liability for those running the organisation
• You plan to apply for charitable status or other regulatory recognition

Keep in mind, using a company limited by guarantee does not automatically make you a registered charity (though it’s the most common structure for new UK charities). If you want to be a registered charity, you’ll need to apply to the Charity Commission after forming the company and meet their requirements. Learn about this in our guide to setting up a UK charity.

Legal Requirements and Documents for Each Structure

For Companies Limited by Shares

• Incorporation documents (memorandum, articles of association)
• Share Certificates issued to each shareholder
• Register of Members, directors, PSCs (Persons with Significant Control)
• Annual filings and accounts to Companies House
• Shareholders’ agreement (highly recommended for multiple owners or investors)

Setting these up with a legal expert will help avoid confusion and disputes later. Don’t just draft them yourself-get them tailored for your company’s needs.

For Companies Limited by Guarantee

• Incorporation documents (memorandum, articles of association-these will specify guarantee structure and limitations on profit distribution)
• Register of Members and Directors: Tracks guarantors and their details
• Statement of guarantee amount for each member (often just £1)
• If pursuing charitable status: additional rules for charitable companies (Charities Act, Charity Commission requirements)

You still have to file accounts and annual confirmation statements with Companies House, just as you would with a limited by shares company. The main difference is the absence of any share capital or share certificates.

Key Legal and Tax Implications

Under both structures, the company is its own legal “person”-it owns assets, can sue/be sued, and enters contracts in its own name. This offers important protection for directors and members.

Directors and members in both types have reporting and fiduciary duties under the Companies Act 2006. It’s important to understand your obligations, especially if you’re new to running a company. You may also want to review our guide to directors’ legal obligations in the UK.

Taxation is similar for both structures: limited companies pay corporation tax on profits, while charities may be exempt if registered and compliant, but a company limited by guarantee that is NOT a registered charity may still face corporation tax (and other taxes, like VAT and PAYE for employees).

Remember, if a company limited by guarantee makes a profit, it still can’t distribute it to “owners”-the funds must go back into the organisation’s goals.

How Do I Decide Between Limited by Shares vs Limited by Guarantee?

This decision comes down to your business’s core purpose, your long-term goals, and how you plan to fund and govern your company. Here are some questions to ask yourself:

• Do I want to run a business that makes profits for its owners? (Go for limited by shares)
• Am I setting up a not-for-profit, charity, trust or club? (Limited by guarantee is probably right)
• Will I need to attract investors by selling shares? (You’ll need a shares structure)
• Am I seeking charitable status? (Limited by guarantee plus registration with Charity Commission)
• Do I want to limit dividends and ensure all profits are reinvested? (Limited by guarantee)

If you’re still unsure, it’s wise to seek tailored advice from a legal expert. Making the wrong choice now can cause headaches later-switching structures isn’t always easy, and unwinding a company that’s set up incorrectly can be costly.

Can I Change Company Structure Later?

If you start out with one type of company but later decide another structure is best, some restructuring is possible. For example:

• From limited by shares to limited by guarantee: Usually requires winding up the original company and forming a new entity (not a simple conversion).
• From limited by guarantee to limited by shares: Also typically means forming a new company and transferring assets/liabilities.

In both cases, you’ll want to take tax, transfer, and compliance implications into account. That’s why it pays to get it right the first time! If needed, read more about business restructuring here.

Key Takeaways

• Choosing between limited by shares vs limited by guarantee is a key early step-get it right to match your company’s goals.
• Limited by shares is best for profit-making businesses where you want to bring in investors, distribute profits, or sell in the future.
• Limited by guarantee is ideal for charities, clubs, and not-for-profit organisations focused on reinvesting profits.
• Both offer limited liability for those involved, but have different rules on profit, ownership, and governance.
• You must comply with Companies House filings, annual accounts, and director/member duties under the Companies Act 2006 for both types.
• Get legal advice early-changing structure later can be complex and costly.
• Avoid templates and DIY documents-have key contracts and articles professionally prepared to ensure your company is protected from day one.

If you’d like support choosing the right company structure for your new business, or help with company documents and filings, you can reach us on 08081347754 or at team@sprintlaw.co.uk for a free, no-obligations chat. We’re here to make your startup journey smooth, safe, and successful!