An LBG is a charity or not-for-profit organisation. These companies are used by NGOs, clubs, sports associations, charities and trade, research, and professional groups. These companies are formed with the goal of providing services to the general public with no profit-making intention.
All members of an LBG are the owners. They do not invest any money in the enterprise; they are not responsible for its debts; they guarantee a fixed amount, such as £1 to £10. Each member's liability is limited to the amount specified in the articles, which is generally £1 but it may be any amount the founders choose. When the company experiences financial difficulties, the members can only be asked for the amount they have guaranteed. If any member decided to withdraw his membership, he must give 7 days’ notice. An LBG can make a profit, but it will be used for the objectives for which it was formed. Profits are not distributed to its members.
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The process of UK company setup for both Limited by guarantee and limited by share are the same. However, there are some differences between LTD and LBG:
1. In an LTD, the number of shares of a shareholder decides how many voting rights he holds. If a shareholder holds 60% of the issued shares, he will be entitled to 60% of the votes. On the other hand, each LBG member has equal voting rights i.e. one member has the right to one vote
2. In an LTD, Shareholders can buy and sell shares. LBG members are not allowed to sell their membership. However, the LBG will have rules for the admission of new members and the termination of existing members.
3. In an LTD, shareholders pay for their shares and then have no further financial obligations. In an LBG, members do not pay for their membership; they offer a guarantee of a fixed amount, such as £1 or £10, which they agree to pay when the company becomes insolvent.
4. In an LTD, shareholders expect to receive dividends and distributions from the company. In an LBG, the achievement of the non-profit goals of the company motivates member participation.
5. An LTD's shareholders are its legal owners, while its directors are responsible for day-to-day operations. All the members of an LBG are the owners and participate in its management on a daily basis or by being committee members.
Also read: Private Company Limited by Shares | UK Company Formation
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