In British or Irish company law, a Limited Company is a 'person' on its own right. This means it can own property (such as a freehold or leasehold) and enter into contracts in its own name. It exists independently and separately from the people involved.

Some limited companies do not have shares and are instead 'limited by guarantee'. In England and Wales, these include commonhold associations and RTM companies (political parties, non-profit organisations). If a company is limited by guarantee, it means that its members have agreed to contribute to the assets of the company if it is wound up.

A company limited by guarantee has members, rather than shareholders, the members of the company guarantee/undertake to contribute a predetermined sum to the liabilities of the company which becomes due in the event of the company being wound up, normally ￡1, in the event of a shortfall upon cessation of business. It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary.

Reasons for a formation of a company

One reason why residents of a block of flats would have a company is to own the freehold or 'head lease'. Freehold gives outright ownership of the property to the company. A 'head lease' is a lease granted directly to the company, who may in turn grant subleases of the property (or parts of it) to the flat owners. However, the company is also often used for collecting a central pool of cash for carrying out repairs and maintenance to common parts of the property. Often it is a condition of buying a flat that the buyer becomes a member or shareholder of the company. In some cases all flat owners automatically become directors.

Another reason for why a company would be set up, is so that leaseholders of flats can exercise their right to manage the building they live in. The right to manage must be exercised through a limited company set up for that purpose. This type of company is called an ‘RTM Company’.

The prime purpose of limited companies is to limit the liabilities of entrepreneurs who use them for business purposes. In exchange for this limited liability, companies are required to make certain information about themselves available to the public. This information is filed at Companies House. The timing and presentation of the information is governed by law.

Flat management companies, although mostly formed for a different purpose, are governed by the same legislation - primarily, the Companies Act 1985. It does not allow flat management companies to be treated any differently to other companies.

The main requirements of this Act affecting flat management companies are that they file:

• an annual report and accounts;
• an annual return; and
• other event-driven notifications (typically changes in directorships or registered office address).

How to form a Guarantee Company

Please click here to start a Company Limited by Guarantee. Start