Guarantee Company: What it Means, How it Works

What Is a Guarantee Company?

A guarantee company is a type of corporation designed to protect members from liability. Guarantee companies often form when non-profit organizations wish to attain corporate status. Clubs, sports associations, students' unions, and other membership organizations, workers' co-operatives, social enterprises, and non-governmental organizations (NGOs) may also form guarantee companies.

Typically, a guarantee company does not distribute profits to its members nor divide its assets into shares. Members of a guarantee company pay a specific sum of money to participate. This amount can vary by member, as well as the size of the guarantee company and whether it is public or private. Guarantee companies can appoint directors who are allowed to take a salary or bonus earned to them in agreement with the company.

How a Guarantee Company Works

Guarantee companies are common in the United Kingdom. They often form to protect the assets of non-profit organizations, unions, and membership organizations. They often use the word “limited” in their name although they may be exempt from doing so. Guarantee companies are also a popular choice for property management companies, which are created to hold an interest in property that is divided into units.

Guarantee companies are incorporated by having at least one director and one member, similar to a traditional corporation limited by share. If the company has any funds remaining from contributions from members, these are often used according to the purpose of the guarantee company, such as funding a museum or other public service projects.

A unique feature of guarantee companies is their limited liability. Members have legal protection to shield them from cases in which transactions might fail; however, each member will be responsible for a nominal sum of money if the guarantee dissolves. This nominal amount, set out in the company's articles, is usually £1, but it can be tailored to any amount that is fit for the situation.

Example of a Guarantee Company

One example of a guarantee company is Cricket Australia, the central administrative body for cricket in the nation. Cricket Australia’s full name is Cricket Australia (Company Limited by Guarantee). It consists of six member associations (Cricket New South Wales, Queensland Cricket, South Australian Cricket Association, Cricket Tasmania, Cricket Victoria, and Western Australian Cricket Association) and has nine independent Directors.

Under its constitution, the liability of each Cricket Australia member is limited to $1,000 each. Cricket Australia receives all gate and signage revenue from international matches and distributes revenue to States under its minimum guarantee financial model. This de-risks States against volatile movements in gate revenue that might arise from the timing and duration of matches, weather, and other external factors.