When you form a company, you come across the phrase ‘Memorandum And Articles of Association’. They sound important. You have the idea they might be like the Ten Commandments or Bill Of Rights; some kind of important legal documents.
Well, they are, and they are not.
They are important in that they state how your company is set up, legally; what it is and is not.
They are not important in that 99.99% of companies can used standard templates; they don’t need their own special articles.
To draft your own articles for a new startup is 1. Time consuming 2. Bothersome and 3. Unnecessary.
Your company is not so important or strange it needs to have a unique constitution. To draft your own watertight Articles requires specialist legal help and we all know that doesn’t come cheap!
Memorandum Of Association
This is a very simple, dull-looking document. It cannot be altered, once published. It is the ‘foundation statement’ of a company. The word ‘company’ means .. a bunch of people! It simply says ‘we, listed here-under, make up this company’.
– Declares the first shareholders;
– States they wish to set up a company and be part of it;
– States the date of incorporation;
– States the type of company;
– States the Act under which the company is registered.
It’s so simple it actually looks stupid. It isn’t. Simple is good engineering!
Articles Of Association
The Articles contain rules about the following:
– Distribution of shares;
– Capitalisation of profits;
– General meetings;
– Directors’ powers;
– Directors’ responsibilities;
– Directors’ decision making;
– Directors’ appointment and removal;
– Directors’ indemnity and insurance.
These are more complicated in layout, but simple to understand. The Articles are the rulebook of the company; what it can and can’t do and what its members can and can’t do.
Most companies use Model articles; a standard template which founders don’t alter in any way, because there’s no need.
Later, when you get fat with cash or things become more complicated, the need may arise to make changes, but this is not the case for most small companies.
Articles can be changed via a special resolution. Members have to pass this special resolution agreeing to the changes. The final changed document must be submitted to Companies House within 15 days of the resolution being passed by the membership.