Important Keywords: Company Limited by Guarantee, Company Limited by Guarantee Registration, Company Limited by Guarantee India, CLG under Companies Act 2013, Company Limited by Guarantee Process, Company Limited by Guarantee Documents, Company Limited by Guarantee Compliance, Company Limited by Guarantee Benefits, Company Limited by Guarantee Liability, CLG Members Liability.
Words: 4,489, Read time: 24 minutes.
Table of Contents
Overview
Most businesses in India are registered as Companies Limited by Shares, where people invest money by buying shares and become shareholders.
However, not every organization is created to earn profits. Some organizations are formed to promote education, sports, charity, research, trade, or other public causes. For such organizations, a Company Limited by Guarantee is often a more suitable option.
In this type of company, the members do not have to invest money by purchasing shares. Instead, they agree to contribute a small fixed amount only if the company is wound up and does not have enough money to pay its debts. This amount is known as the guarantee amount.
This structure provides limited liability to its members while allowing the organization to focus on achieving its social or professional objectives rather than distributing profits.
What is a company limited by Guarantee in India?
Section 2(21) of the companies Act, 2013 state that “company limited by guarantee” means 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.
Let's understand in this way: A Company Limited by Guarantee (CLG) is a type of company that is usually formed to promote a social, charitable, educational, cultural, religious, or professional purpose rather than to earn profits for its members.
Instead of investing money by buying shares, the members promise to contribute a fixed amount of money only if the company is closed (wound up) and its assets are not enough to pay its debts. This promised amount is called the guarantee amount, and it is mentioned in the company's Memorandum of Association (MOA).
For example: Suppose five people start a charitable organization. Each member agrees that if the company is ever wound up and still has unpaid debts, they will contribute up to ₹5,000 each. As long as the company continues to operate normally, they do not have to pay this guarantee amount.
Unlike a Company Limited by Shares, where the members' liability is limited to the unpaid amount on their shares, a Company Limited by Guarantee limits the members' liability to the amount they have agreed to contribute only if the company is wound up.
Companies Limited by Guarantee are commonly used by charitable organizations, educational institutions, clubs, trade associations, professional bodies, sports organizations, and other non-profit organizations that work for a public or social cause instead of distributing profits among their members.
Legal provisions of Company Limited by Guarantee
Section 37 of the Companies Act, 2013
- Section 37(1): A Company Limited by Guarantee without share capital cannot give non-members a right to receive the company's profits. If the MOA, AOA, or any company resolution contains such a provision, it is legally invalid.
- Section 37(2): If a Company Limited by Guarantee divides its ownership into shares or similar interests, the law will treat it as a company having share capital, even if those shares or interests are not given a specific value or number.
Key features of the company limited by Guarantee
1. Separate legal entity
A Company Limited by Guarantee has its own legal identity, separate from its members. It can own property, enter into contracts, open bank accounts, borrow money, and sue or be sued in its own name.
2. Limited liability of members
The members are liable only up to the amount they have agreed to contribute if the company is wound up and its assets are insufficient to pay its debts. Their personal assets are generally protected.
3. Members give a guarantee instead of investing through shares
In a company limited by guarantee without share capital, the members do not become owners by purchasing shares. Instead, they promise to contribute a fixed amount if the company is wound up.
Note: Under the Companies Act, 2013, A Company Limited by Guarantee may be incorporated either with or without share capital. A CLG that has share capital can issue shares in accordance with the Companies Act, while a CLG without share capital cannot issue shares.
4. Mainly used for non-profit purposes
This type of company is commonly used by charities, educational institutions, clubs, trade associations, professional bodies, sports organizations, and other organizations working for a social or public cause.
5. Guarantee amount is mentioned in the MOA
The amount each member agrees to contribute is specified in the company's Memorandum of Association (MOA).
6. Perpetual Succession
The company continues to exist even if its members or directors change, resign, retire, or die. It exists until it is legally dissolved.
7. Can be incorporated as a private or public company
A company limited by guarantee may be registered as either a private company or a public company, depending on its objectives and the legal requirements.
Benefits of a company limited by guarantee
1. Protects members' personal assets
Members are generally not personally responsible for the company's debts. Their liability is limited to the guarantee amount they agreed to contribute if the company is wound up.
2. Ideal for non-profit organizations
This structure is suitable for organizations that want to work for charitable, educational, cultural, religious, or professional purposes rather than distribute profits among members.
3. Separate legal identity
Since the company has its own legal identity, it can own assets, enter into contracts, receive grants or donations, and carry on its activities independently of its members.
4. Builds Trust and Credibility
A registered company structure generally inspires greater confidence among donors, members, government authorities, financial institutions, and other stakeholders.
5. Long-Term continuity
The company continues to operate even if its members or directors change, ensuring stability and continuity of its activities.
6. Flexible company structure
A company limited by guarantee can be formed with or without share capital, allowing founders to choose the structure that best suits their objectives.
7. Focus on the organization's mission
Instead of distributing profits to members, the organization's resources are generally used to support and achieve its stated objectives, making it well suited for mission-driven organizations.
Understand the structure of the Guarantee Company
A Company Limited by Guarantee (CLG) has a different structure from a company limited by shares. Instead of shareholders, it is mainly made up of members who agree to guarantee a small amount if the company is wound up.
Let's understand how its structure works:
1. Members (Guarantors)
Instead of shareholders, a CLG has members, who are also called guarantors. They agree to contribute a fixed amount if the company is wound up (closed) and does not have enough money to pay its debts.
2. Guarantee Amount
Every member promises to contribute a fixed amount towards the company's debts only if the company is wound up. This amount is called the guarantee amount and is mentioned in the Memorandum of Association (MOA) when the company is incorporated.
3. Board of Directors
Like every other company, a Company Limited by Guarantee also needs people to manage its day-to-day operations. This responsibility is handled by the Board of Directors. The directors are appointed by the members and run the company according to the Companies Act, 2013 and the company's governing documents.
4. Share Capital (Optional)
A Company Limited by Guarantee can be registered with or without share capital. However, most CLGs, especially non-profit organizations, charities, clubs, and associations, are registered without share capital because they are not created to distribute profits to their members.
5. Memorandum of Association (MOA)
The Memorandum of Association (MOA) is one of the main documents of a CLG. It contains the company's objectives, the guarantee amount agreed by each member, and other important information required at the time of incorporation.
6. Articles of Association (AOA)
The Articles of Association (AOA) contain the internal rules for running the company. They explain how directors are appointed, how meetings are conducted, how decisions are made, and other rules for managing the company.
How to set up a company limited by Guarantee?
The process of setting up a Company Limited by Guarantee involves the following steps:
- Decide the Purpose and Structure
Decide the company's objectives, number of members, directors, and guarantee amount. - Choose a Company Name
Select a name that complies with the applicable company law requirements. - Prepare MOA and AOA
Draft the Memorandum of Association (MOA) mentioning the company's objectives and guarantee amount, and prepare the Articles of Association (AOA) containing the internal rules of the company. - Appoint Members and Directors
Appoint members (guarantors) who agree to contribute the guarantee amount and directors who will manage the company. - File Incorporation Documents
Submit the required documents and incorporation application to the Registrar of Companies (ROC). - Receive Certificate of Incorporation
Once approved, the ROC issues the Certificate of Incorporation, and the company becomes legally established. - Complete Post-Incorporation Compliance
Maintain records, conduct meetings, and complete other legal compliance requirements.
What are company limited by Guarantee used for?
As we know, a Company Limited by Guarantee (CLG) is primarily used by non-profit organizations that aim to promote charitable, educational, social, cultural, religious, scientific, or community welfare activities.
A Company Limited by Guarantee is commonly used for the following purposes:
- Charitable organizations and NGOs working for social welfare, poverty relief, healthcare, or environmental protection.
- Educational institutions such as schools, colleges, training institutes, and educational trusts.
- Sports clubs and sports associations that promote sports, fitness, and recreational activities.
- Trade associations that represent the interests of businesses or industries.
- Professional bodies for lawyers, doctors, accountants, engineers, architects, and other professionals.
- Religious organizations involved in religious, spiritual, or faith-based activities.
- Arts and cultural organizations that promote music, dance, theatre, literature, heritage, and cultural events.
- Research organizations engaged in scientific, medical, technological, or social research.
- Community welfare organizations working for women, children, senior citizens, persons with disabilities, or rural development.
- Resident Welfare Associations (RWAs) and housing societies managing common facilities and community services.
- Environmental organizations working on conservation, climate change, wildlife protection, and sustainable development.
- Public interest organizations that promote consumer rights, legal awareness, human rights, or public policy initiatives.
- Foundations and philanthropic organizations established to support charitable projects and public welfare programs.
A Company Limited by Guarantee is the right choice when the main objective is to serve a social, charitable, or public purpose rather than distribute profits among members. Any surplus generated is generally used to further the organization's objectives.
Step-by-Step process to Register a Company Limited by Guarantee
Before you begin, keep in mind that the registration process for a Company Limited by Guarantee is almost the same as that of a Company Limited by Shares. The application is filed through the MCA V3 Portal. Follow the steps below to register a Company Limited by Guarantee.
Step 1: Obtain a Digital Signature Certificate (DSC)
The first step is to obtain a Class 3 Digital Signature Certificate (DSC) for all the proposed directors and subscribers (guarantor members). A DSC is required to digitally sign the incorporation forms filed with the MCA.
Step 2: Apply for Name Approval (SPICe+ Part A)
Create an account on the MCA V3 Portal if you do not already have one. Then, open SPICe+ Part A and submit up to two proposed company names. While filling out the form, select "Company Limited by Guarantee" as the company category.
Step 3: Prepare the Incorporation Documents
Prepare all the required incorporation documents, including the Memorandum of Association (MOA) and Articles of Association (AOA) specifically drafted for a Company Limited by Guarantee (without share capital). Also, keep the identity and address proof of the directors and subscribers ready.
Step 4: Fill SPICe+ Part B
After the company name is approved, complete SPICe+ Part B by providing the company's registered office address, details of the directors and subscribers, and the guarantee amount agreed to by each member.
Step 5: Upload Documents and Pay the Fees
Upload all the required documents, such as identity proof, address proof, declarations, MOA, and AOA. After uploading the documents, pay the applicable government registration fees and state stamp duty online.
Step 6: Receive the Certificate of Incorporation
Once the Registrar of Companies (ROC) verifies your application and documents, the company will be registered. You will receive the Certificate of Incorporation (COI), along with the Corporate Identification Number (CIN). The company is legally formed from the date mentioned on the certificate.
What documents are required to register a company limited by Guarantee?
The following documents are generally required to register a Company Limited by Guarantee:
- PAN Card of all proposed directors and subscribers (for Indian nationals).
- Aadhaar Card of all proposed directors and subscribers (for Indian nationals).
- Passport (mandatory for foreign nationals and NRIs; optional for Indian citizens if required as identity proof).
- Address proof of all proposed directors and subscribers (such as a bank statement, electricity bill, telephone bill, or passport, as applicable).
- Passport-size photographs of the proposed directors and subscribers (if required by the professional handling the incorporation).
- Proof of the registered office address (such as a recent electricity bill, water bill, gas bill, or property tax receipt).
- No Objection Certificate (NOC) from the owner of the registered office, if the premises are rented or not owned by the company.
- Memorandum of Association (e-MOA or physical MOA, as applicable).
- Articles of Association (e-AOA or physical AOA, as applicable).
- Consent to act as Director (Form DIR-2).
- Declaration by subscribers and first directors (INC-9), where applicable.
Who can register a Company Limited by Guarantee?
A Company Limited by Guarantee can be incorporated by individuals and eligible legal entities, including:
- Indian residents
- NRIs and foreign nationals, subject to applicable legal requirements
- Body corporates, where permitted
- LLPs
- Existing companies, where legally permitted
The incorporation must comply with the applicable provisions of the Companies Act, 2013 and other relevant laws.
Common questions
Q. How many people will I require to register a company limited by guarantee?
Ans. When registering a company limited by guarantee at the Registrar of Companies (ROC) through the MCA portal, they will require at least one director and one guarantor. However, you can assume both positions when starting on your own, or you can have directors and other members; it's all up to you.
Q. Can guarantors take a share of the profits?
Ans. Guarantee companies do not issue shares, meaning all members are not entitled to any shares in the company. All the profits are reinvested in the company. However, it is possible for members to distribute profits among themselves, but then the charitable status of the company becomes invalid.
Q. Who can be a guarantor?
Ans. Any person can become a guarantor; this person is required to contribute to the company as all members do.
Q. Who owns a company limited by guarantee?
Ans. A Company Limited by Guarantee does not have shareholders (where it has no share capital). Instead, it is controlled by its members (guarantors), who exercise voting and governance rights under the MOA and AOA. There are no shares in the company, all members are required to participate and fund the company to run its day-to-day activities.
Q. Why would I incorporate a company limited by guarantee?
Ans. The main reason why people join limited by guarantee companies is that the company protects its members from personal liability for the company's debts, just as a business may be set up as a company limited by shares for the same reason. The company is generally regarded by funding bodies and public agencies as a more stable structure than a voluntary structure; this builds trust from investors and supporters.
Q. Do I have to register as a company limited by guarantee?
Ans. Yes, you need to register the company at the Registrar of Companies (ROC) through the MCA portal.
Q. What happens to the profits the company makes?
Ans. All the profits made by a guaranteed company are reinvested in the company to achieve all its goals more effectively.
Q. How can a company limited by guarantee raise funds if it has no shares to issue?
Ans. Limited guarantee companies get funds from investors, clients, and supporters.
Understanding Members' Liability in a Company Limited by Guarantee (CLG)
In a Company Limited by Guarantee (CLG), members have limited liability, which means they are responsible for the company's debts only up to the amount they have agreed to guarantee.
Unlike a company limited by shares, a CLG does not have shareholders or share capital. Instead, it has members who promise to contribute a fixed amount if the company is unable to pay its debts during winding up (closure of the company).
This fixed amount is called the guarantee amount. The amount is decided when the company is formed and is mentioned in its constitution. It can be a small amount, such as ₹5,000 or ₹2,000.
For example: if a member has agreed to guarantee ₹5,000, their maximum liability is limited to ₹5,000 only. They do not have to use their personal savings, property, or other assets to pay the company's debts.
The liability of members generally arises only when the company is being wound up and the company's own assets are not enough to clear its debts. During normal operations, members do not need to pay anything just because the company suffers losses or faces financial problems.
A Company Limited by Guarantee protects its members from unlimited financial risk. Members support the organisation, but their responsibility is limited to the amount they have promised to contribute. This structure is commonly used by charities, clubs, associations, and non-profit organisations.
Aashaan shabdo me simple funda ye hai: CLG mein aap company mein paisa invest karke shareholder banne ke bajaye member/guarantor ke roop mein aate ho aur ek fixed amount contribute karne ka promise karte ho, generally agar company winding up ke time apni liabilities pay nahi kar paati. Isliye guarantee amount ko share capital samajhna galat hoga. Company ka purpose, members ka role, directors ki responsibility aur ongoing compliance sab equally important hain. Matlab “non-profit” ka label lagana enough nahi hai — structure ko organization ke actual purpose ke saath match karna zaroori hai.Conclusion
In this article, we have discussed the most important aspects of a Company Limited by Guarantee (CLG) that every individual should know before choosing this type of company structure. We explained the meaning, purpose, legal provisions, key features, benefits, ownership structure, role of members and guarantors, members' liabilities, and the step-by-step registration process of a Company Limited by Guarantee under the Companies Act, 2013.
We also covered how a Company Limited by Guarantee works, why it is commonly preferred for non-profit organizations, charitable activities, social welfare projects, educational institutions, community services, and other organizations working for public benefit rather than profit distribution.
We hope this article has helped you gain a clear understanding of the concept of a Company Limited by Guarantee (CLG), its importance, and how it provides a suitable legal structure for organizations that aim to achieve social, charitable, and community-focused objectives while providing limited liability protection to its members.
Disclaimer: The information in this article is for general purposes only and may not fit your personal situation. It is not legal, financial, or professional advice, and you should not rely on it as such. Before making any decisions, consider if this information applies to you and, if needed, get advice from a professional. The information is correct at the time of publication. While we have tried to ensure it is accurate, Finodha.in is not responsible for any loss or damage caused by using this information.
If you have any questions or notice anything missing in this article, you can contact/email me at help@finodha.in. You can also share your queries, and I will update the article to include any missing points, making it a complete guide for everyone.
Disclaimer: The information in this article is for general knowledge purposes only and should not be considered legal, tax, or professional advice.
click here: for GST and ITR filing.
Hi, Go On, Tell Us What You Think about the Company Limited by Guarantee (CLG)! Did we miss something to explain in this Article? Come on! Tell us what you think about our article in the comment/e-mail section.FAQs: Get answers to all your queries!
Question. What is a Company Limited by Guarantee?
Answer. A Company Limited by Guarantee (CLG) is a type of company where members promise to contribute a fixed amount if the company cannot pay its debts and is closed.
Question. How does a Company Limited by Guarantee work?
Answer. A Company Limited by Guarantee works through its members, who manage the company and agree to contribute a fixed amount if the company is unable to pay its debts or is wound up.
Question. Why is a Company Limited by Guarantee preferred for non-profit organizations?
Answer. Because a Company Limited by Guarantee is usually used for charity and community welfare purposes, where the main goal is to serve society rather than earn and distribute profits.
Question. What are the common uses of a Company Limited by Guarantee?
Answer. A Company Limited by Guarantee is mainly used for charitable activities, social welfare projects, educational purposes, community services, sports clubs, and other organizations that work for the benefit of society or the public rather than for distributing profits among members.
Question. What are the advantages of incorporating a Company Limited by Guarantee?
Answer. The main advantages of incorporating a Company Limited by Guarantee are that members' personal liability is limited, the organization can own assets in its own name, enter into contracts, and continue its activities even when members change.
Question. Is a Company Limited by Guarantee suitable for a business that wants to make profits?
Answer. No, it is mainly designed for organizations that operate for non-profit, charitable, social, or community-focused purposes rather than for making and distributing profits.
Question. Who owns a Company Limited by Guarantee?
Answer. A Company Limited by Guarantee is owned by its members (guarantors), who run and control the company instead of shareholders.
Question. Can a Company Limited by Guarantee have shareholders?
Answer. No, a Company Limited by Guarantee does not have shareholders. Instead, it has members who manage and control the company and are responsible for carrying out its activities.
Question. Can a Company Limited by Guarantee issue shares?
Question. What rights do members have in a Company Limited by Guarantee?
Answer. The members of this company have the right to participate in decision-making, vote on company matters, appoint or remove directors, and oversee the company's activities according to its rules.
Question. Can a Company Limited by Guarantee have unlimited members?
Answer. Yes, a Company Limited by Guarantee can have an unlimited number of members unless its Articles of Association specify any limit.
Question. Is there any minimum or maximum limit on the number of members?
Answer. In this type of company there must have at least one member, and there is generally no maximum limit on the number of members.
Question. How can a member join or leave a Company Limited by Guarantee?
Answer. The process of joining or leaving a Company Limited by Guarantee is governed by the company's Articles of Association, which define membership eligibility, admission, and resignation procedures.
Question. Who is a guarantor in a Company Limited by Guarantee?
Answer. A guarantor in a Company Limited by Guarantee is a member who agrees to contribute a fixed amount towards the company's liabilities if the company is unable to pay its debts or is wound up.
Question. Can guarantors receive profits from a Company Limited by Guarantee?
Answer. No, guarantors generally cannot receive profits from a Company Limited by Guarantee because it is mainly formed for non-profit purposes.
Question. What happens to the guarantee amount when the company is dissolved?
Answer. When a Company Limited by Guarantee is dissolved, the guarantee amount is used to help pay the company's outstanding debts, and members are liable only up to the amount they agreed to contribute.
Question. What documents are required to incorporate a Company Limited by Guarantee?
Answer. List of required documents:
-Digital Signature Certificate (DSC) of proposed directors and subscribers
-Identity and address proof of directors and members
-Memorandum of Association (MOA)
-Articles of Association (AOA)
-Proof of registered office address
-Consent and declarations from directors and subscribers
-Other incorporation forms and documents required by the MCA/ROC.
Question. What happens when a Company Limited by Guarantee is dissolved?
Answer. After the dissolution of this company, the assets are used to settle its liabilities, and guarantors are liable to pay the amount they have guaranteed. Any remaining assets are distributed according to the company's rules and applicable laws.
Question. Are guarantor details disclosed publicly?
Answer. Yes, the details of guarantors (members) are generally disclosed in the company's incorporation documents and may be available for public inspection through the relevant company registry.
We’re Available:
If you need clarity on your specific compliance requirement, you can explore our detailed service pages or connect with our team:
📞 +91-8512022044
📩 help@finodha.in
We'll handle the paperwork while you focus on building your business; If you have any questions to ask; contact us now.
Read more interesting articles:
