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Understanding the Difference: Company Limited by Shares vs. Company Limited by Guarantee in Residential Block Management

Writer's picture: Rayanne ArmandRayanne Armand

Updated: Nov 25, 2024

If you manage a residential block or have an interest in service charges, you may have come across terms like "company limited by shares" and "company limited by guarantee." These are common structures for Resident Management Companies (RMCs) in the UK, but they work in different ways. Let’s break down the key differences and their significance in residential block management.


 

Company Limited by Shares

A company limited by shares is typically used for profit-making businesses, but it’s also sometimes used for RMCs. Here’s what it means in practical terms:

Key Features

  1. Ownership: A company limited by shares has shareholders. Each shareholder owns a portion of the company based on the number of shares they hold. For RMCs, these shareholders are usually the flat owners in the building.

  2. Liability: Shareholders’ liability is limited to the amount they’ve invested in their shares. This means that if the company runs into financial trouble, shareholders only risk the value of their shares.

  3. Profits: In a typical profit-making company, shareholders receive dividends based on the company’s profits. However, RMCs don’t operate to make a profit, so this feature is not generally relevant in this context.

Example: How This Works in an RMC

If your RMC is a company limited by shares, each flat owner might hold a single share in the company. This share gives them a say in how the building is managed and entitles them to vote on important decisions.


 

Company Limited by Guarantee

A company limited by guarantee is more common for RMCs because it’s well-suited to non-profit organisations. It has no shareholders; instead, it has "members."

Key Features

  1. Membership: In this type of company, each flat owner is a member, not a shareholder. Members don’t own shares, and they don’t earn a profit from the company.

  2. Liability: Members' liability is limited to a nominal amount, often just £1. This means that if the company runs into debt, each member would only be responsible for a small, predetermined sum.

  3. Purpose: Companies limited by guarantee are typically non-profit. This aligns well with RMCs, as the purpose of an RMC is to manage the property, not to generate profits.

Example: How This Works in an RMC

In a company limited by guarantee, flat owners are members who guarantee a nominal amount (like £1) rather than owning shares. They still have a voice in management decisions, but they don’t stand to make any profit from the company. This structure keeps the focus on maintaining and improving the property rather than on financial returns.


 

Additional Consideration: Funding Needs

One major difference between these structures that often goes unnoticed is the ability to raise funds. Under the Companies Act, directors of a company limited by shares have the authority to call on shareholders to provide additional funds when needed. This can be particularly useful in situations where unexpected expenses arise, such as major repairs or emergency maintenance, as shareholders may be asked to contribute more capital based on the shares they hold.


In contrast, in a company limited by guarantee, the directors do not have the authority to call on members for additional funds beyond the nominal guarantee amount (usually £1 or a similarly small sum). If a company limited by guarantee requires extra funding, it would need to rely on other methods, such as increasing service charges or seeking loans. This limitation ensures that members' financial obligations remain minimal but may also restrict the company’s options if large or unexpected expenses arise.


This difference is important to consider for Resident Management Companies. While a company limited by guarantee keeps financial demands on members low and predictable, the added flexibility in a company limited by shares to call on shareholders for funds can be advantageous in certain circumstances. However, it’s worth noting that for most RMCs, regular service charges and sinking funds are typically enough to meet the building’s needs without needing to rely on shareholder contributions.




Block of Flats


Key Differences: At a Glance

Aspect

Company Limited by Shares

Company Limited by Guarantee

Ownership

Shareholders (own shares)

Members (no shares)

Liability

Limited to the value of shares

Limited to a nominal guarantee amount

Profit

Shareholders may receive dividends

No profit distribution

Funding Ability

Directors can call on shareholders for funds

Directors cannot call on members for funds

Suitability for RMCs

Less common, can work if set up properly

More common, aligns with non-profit focus

 

Which Structure is Better for an RMC?

For most Resident Management Companies, a company limited by guarantee is preferred because it aligns with the non-profit, service-focused nature of block management. Since RMCs don’t exist to make a profit but to serve the residents, having a structure where no one owns shares or expects dividends keeps the focus on the property rather than profit-making.


However, some RMCs are companies limited by shares. This can work well too, as long as residents understand their roles as shareholders and the company’s purpose remains focused on property management.


Final Thoughts

Choosing the right structure for an RMC is crucial to its effective operation. While both companies limited by shares and companies limited by guarantee can serve as RMCs, each has specific implications for ownership, liability, and decision-making. Generally, companies limited by guarantee are a better fit because they align with the typical goals of block management—maintaining the property in the best interests of all residents.


Understanding these differences will help you know what to expect from your RMC and ensure that your residential block is managed smoothly and fairly.

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