DEFINITION of 'Guarantee Company'
A form of corporation designed to protect members from liability, but which typically does not distribute profits to its members and does not divide assets into shares. Members of a guarantee company are obligated to pay a specific sum of money – a guarantee – if the company is wound up. This amount of money can vary by member, but is typically very small for private guarantee companies and larger for public guarantee companies.
BREAKING DOWN 'Guarantee Company'
Guarantee companies are most commonly found in the United Kingdom, and are formed to protect the assets of non-profit organizations, unions and membership organizations. This type of corporation is recognizable by the use of the word “limited” in its name.
In addition to being limited by guarantee, a guarantee company may also be limited by share capital. If the company has any funds remaining from contributions from members, they have to be used according to the purpose the guarantee company was formed to undertake, such as funding a museum, and cannot be distributed to members.
The allure of guarantee companies is their limited liability. Members have legal protection to shield them from instances in which a transaction the guarantee company is involved in fails, but they will be responsible for a nominal sum of money if the guarantee dissolves.