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Jan 23
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Posted by:Esha Jain
Incorporation of Company without Share Capital

What is a company without share capital?

A Company Limited by Guarantee and not share capital is called a company incorporated without share capital. Unlike, a company limited by shares, a company limited by guarantee does not have shareholders rather members who act as guarantors.

What is the liability of a Company Limited by Guarantee?

The liability of the member is up to the amount which it undertakes to contribute in the event of winding-up, while being a member or within a year after he ceases to be a member:

  • To the assets of the company;
  • For the payment of the debts or liabilities of the company; and
  • To the costs and expenses of winding-up

Formation of Company Limited by Guarantee

Such a company can be formed for lawful purposes under the provisions of the Companies Act, 2013, by one or more persons, by subscribing his or their names to the memorandum.

Incorporation of a Company Limited by Guarantee

Incorporation of a company limited by guarantee is similar to that of a company limited by shares.

  • The company must file registration with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated. The Central Government may by license issued prescribe the registration of the company.
  • The following documents and information is required for the registration;
  1. The Memorandum and Articles of the Company duly signed by the subscriber/s. The Memorandum includes the Name Clause, Object Clause and Liability  Clause. (Such a company cannot alter its memorandum or articles without prior permission from the Central Government)
  2. A copy of resolution declaring the amount of guarantee
  3. An affidavit from each subscriber to the memorandum and from persons named as first directors, stating that the contents of the articles, documents and information are true, complete and fair to the best of his/ their knowledge and belief
  4. Details of the members and directors as well the registered office of the company
  • The Registrar on the basis of the documents and information provided issues a Certificate of Incorporation in the prescribed form.
  • The Registrar shall then allot to the company a Corporate Identity Number. The company shall maintain these records in the Registered Office.
  • The Central Government may by order revoke the license by order, granted to the company if the company contravenes any of the requirements of the section, the affairs of the company are fraudulently conducted or the operations of the company are violative of its objects.
  • When the license is revoked if the Central Government is satisfied that it is best in the public interest, that the company registered under this section should Wind-up or Amalgamate with another company having similar objectives

If the company makes any default in complying with any provision or requirement then without prejudice to any other provision of the section the company is punishable to pay fine of amount not less than ten lakh rupees may extend upto one crore rupees and every director in default is punishable to imprisonment upto three years or fine not less than rupees twenty-five thousand upto rupees twenty-five lakh or both.

From the date of incorporation mentioned in the certificate, any person, body corporate or firm can be a member by subscription to the memorandum from time to time.

Features of a Company Limited by Guarantee:

  • A limited liability company without a share capital is mostly incorporated for Non-Profit Organization or Charitable purpose
  • It is exempted from adding the suffix to its name like “Limited” or “LTD”.
  • It has a separate legal status
  • It does not dissolve upon the death of its members, it has perpetual succession and dissolves only through winding up
  • The profits earned by the company cannot be distributed amongst its members in any form of dividend or bonus
  • It protects the members from any excess liability.
  • It intends to apply its profits, if any, or any other income in promoting its objects and promotion of arts, commerce, science, research, charity, social welfare etc
  • Initial contributing funds can be obtained from grants, endowments, subscription fees or through grants and donations from public or Government
  • Such a company usually is in form of a Trade Association, religious, charitable or educational purposes, clubs, Students Union or any other Charitable purpose.

Conclusion:

Thus, a company is set up with limited guarantee to run a Non-Profit Organisation or Charity. The profits earned by the same are utilized in promoting the objects and not distributed amongst the members, any clause or provision made to provide to such members will be void. A company limited by guarantee protects the members as they are liable to contribute to the extent in the memorandum. It enjoys all the privileges and be subject to all the obligations like the limited companies. 

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