Characteristics of a section 21 company

Answer 1

A section 21 company, also known as a non-profit company or a company limited by guarantee, is typically used for non-profit or charitable purposes. The main characteristics of a section 21 company include:

1. Non-profit status: Section 21 companies are established for non-profit purposes. They are not intended to generate profit for their members or shareholders.

2. Limited liability: Like other limited liability companies, section 21 companies provide protection for its members against personal liability for the company's debts or obligations. However, instead of having shares, section 21 companies have guarantors who promise to contribute a specific amount towards the company's liabilities in the event of winding up.

3. Guarantors instead of shareholders: Instead of shareholders, section 21 companies have guarantors who contribute a specific amount, known as the guarantee, towards the company's liabilities. Guarantors are not entitled to any share in the profits of the company.

4. No share capital: Section 21 companies do not issue shares, and therefore they do not have share capital. Instead, the guarantors contribute a guarantee amount, usually a nominal amount like £1 or £10.

5. Charitable or non-profit objectives: Section 21 companies are typically established for charitable, social, educational, or other non-profit purposes. These purposes must be clearly defined in the company's constitutional documents, such as the Memorandum and Articles of Association.

6. Purpose restrictions: Section 21 companies are subject to certain restrictions on the use of their income and assets. They are required to use their income and assets solely for the promotion of their objectives and any profits or gains must be reinvested into the company.

7. Members' voting rights: Like other companies, section 21 companies have members who have voting rights. Each member usually has one vote, regardless of the amount of guarantee they contribute. However, the articles of association may specify different voting rights for different classes of members.

8. Winding up restrictions: Section 21 companies have restrictions on distribution of assets upon winding up. Any assets remaining after payment of debts and liabilities must be transferred to another non-profit organization with similar objectives. This ensures that the assets are used for the intended non-profit purposes.

It's important to note that the specific characteristics of section 21 companies may vary depending on the jurisdiction in which they are incorporated. The above characteristics provide a general overview, but it is advisable to seek legal advice to understand the specific requirements and regulations applicable in a particular jurisdiction.