11.1 A company limited by guarantee is a separate legal entity established by persons or other bodies each of whom agrees to pay a certain sum (frequently just £1) if demanded, and to become a member of the company. The members then meet to appoint Directors to run the company. The member's liability is limited to their guarantee, although directors may have personal liability in wrongful trading where the company is insolvent and the directors have failed to take all reasonable steps to minimise losses to creditors.
11.2 The main difference between a company limited by shares and a company limited by guarantee is that a company limited by guarantee has no means of distributing any profit to shareholders. As a result, it can be formed on the basis that it cannot distribute any profit to its members, and can therefore, depending on its purposes, obtain registration as a charity, thereby gaining considerable tax advantages. This also gives funding agencies the confidence that any grants which they provide must be applied to that business and cannot be distributed to the members of the company. As a result, a company limited by guarantee is the standard form of corporate vehicle for charities and for inter-authority joint working where a corporate vehicle is required. A corporate vehicle is one that has a separate legal identity from its owners.