What is a guarantee company?
A guarantee society is a type of society designed to protect members from liability. Guarantee societies often form when non-profit organizations seek corporate status. Clubs, sports associations, student unions and other membership organizations, worker cooperatives, social enterprises and non-governmental organizations (NGOs) can also set up guarantee societies.
Generally, a guarantee society does not distribute profits to its members or divide its assets into shares. Members of a guarantee society pay a certain amount of money to participate. This amount may vary depending on the member, as well as the size of the guarantee company and whether it is public or private. Guarantee companies can appoint directors who are authorized to collect a salary or a bonus due to them in agreement with the company.
Key points to remember
- Guarantee companies are organized to offer limited liability to their members.
- Many property management companies choose to become warranty companies to protect themselves from certain legal claims.
- This form of company is most commonly found in England, Ireland, Scotland and Wales.
How does a warranty company work?
Guarantee companies are common in the UK. They often form to protect the assets of nonprofits, unions, and membership organizations. They often use the word “limited” in their name, although they may be exempt. Security companies are also a popular choice for property management companies, which are set up to hold an interest in real estate divided into units.
Guarantee companies are set up with at least one director and one member, like a traditional public limited company. If the company has funds left over from member contributions, these are often used depending on the purpose of the guarantee company, such as funding a museum or other public service projects.
A unique feature of warranty companies is their limited liability. Members benefit from legal protection to protect them in cases where transactions could fail; however, each member will be liable for a nominal sum of money if the guarantee terminates. This nominal amount, set out in the company’s articles of association, is usually £1, but it can be adjusted to any amount appropriate to the situation.
Because a guarantee company has no shareholders receiving profits, its members are all equally responsible for paying creditors if the company goes bankrupt.
Example of a guarantee company
An example of a guarantor society is Cricket Australia, the central administrative body for cricket in the country. The full name of Cricket Australia 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 member of Cricket Australia is limited to $1,000 each. Cricket Australia receives all gate and signaling revenue from international matches and distributes the revenue to the states under its minimum guarantee financial model. This reduces risks to states against volatile movements in gate revenue that could result from the timing and duration of matches, weather conditions and other external factors.