When forming a company in the UK, one key document you'll encounter is the articles of association (also known as articles of incorporation). Often described as the 'rulebook' for a company, this legal document outlines how a business will be governed and operated. In this guide, we'll delve into their meaning, purpose, legal effects and more.
Articles of association meaning
Articles of association define the rules that govern the internal management of a company. These rules set out the roles and responsibilities of directors, the rights of shareholders and procedures for meetings and decision-making. In essence, they're a contract between the company and its members (shareholders) and also between the members themselves.
Some of the key features of articles of association include:
Governance framework: Outlining how decisions are made and by who.
Ownership rights: Clarifying shareholder entitlements, such as voting rights and dividend distribution.
Operational rules: Setting policies on issuing new shares, transferring ownership or dissolving the company.
What’s the difference between memorandum and articles of association?
The memorandum of association (MoA) and articles of association are both founding documents required for company incorporation in the UK. An MoA limits the company's powers and activities, while articles of association are more of a set of rules that state how a company is run.
💡Editor's insight
"I see a lot of people struggle to understand the differences. Think of it this way - the memorandum is like the birth certificate of the company, while the articles are its ongoing operational manual."
Memorandum of association explained
A memorandum is a short document that confirms the company’s intent to incorporate and sets out its initial subscribers (founding members). It is a historical record that cannot be changed after the company’s formation. In the UK, it no longer details the company’s objectives but is required as a formality for incorporation.
What do articles of association need to include?
While articles of association can vary depending on the company’s needs, there are core elements that must be addressed. These include:
Director powers and responsibilities: The articles should define the scope of authority for company directors, including how they are appointed or removed and their duties to the company.
Shareholder rights and obligations: Details on share allocation, voting rights, and how dividends are distributed should be included. This ensures clarity on ownership and financial benefits.
Decision-making processes: Rules for holding board meetings, passing resolutions, and voting thresholds should be outlined to guide effective governance.
Issuing and transferring shares: The articles must specify the process for issuing new shares or transferring existing ones. Restrictions on share transfers may also be included to maintain control over ownership.
Dispute resolution mechanisms: Having provisions for resolving disputes between shareholders or directors can prevent prolonged legal battles.
Winding up the company: The articles should outline procedures for dissolving the company, ensuring an orderly closure if required.
Can they ever be changed?
Yes, articles of association can be amended, but this requires careful adherence to legal procedures. This includes:
Shareholder approval: Amendments typically require a special resolution, which means at least 75% of voting shareholders must agree.
Filing with Companies House: Any changes must be registered with Companies House within 15 days.
When should you amend articles?
Amendments cannot override legal requirements under the Companies Act 2006 or breach shareholder agreements. However, businesses often update their articles to reflect changes such as:
Introducing new share classes for investors
Adjusting director roles and responsibilities
Adapting governance rules to meet regulatory changes
What are ‘model’ articles of association?
Model articles of association are a standardised set of rules provided by the UK government. These are designed to simplify the incorporation process, particularly for small businesses and start-ups, by providing a ready-made template.
When to use model articles
Model articles are suitable for companies with straightforward governance needs. They provide a good starting point and cover general scenarios such as:
Director responsibilities
Shareholder voting rights
Distribution of dividends
Can you customise model articles?
Yes, while model articles offer convenience, many businesses choose to customise them to reflect specific needs. Common examples are unique share structures or bespoke decision-making rules. Customisation often requires legal expertise to ensure compliance and alignment with the company’s goals.
Can I use an article of incorporation template?
Yes, you can use an article of incorporation template to draft your articles of association. Templates, including model articles, are widely available online and through legal service providers. However, they won't suit every business - here are some of the pros and cons:
Advantages ✅ | Limitations ❌ |
|---|---|
Templates offer a quick and easy starting point for businesses with straightforward needs | They may not account for complex share structures or investor agreements |
They eliminate the expense of creating bespoke articles from scratch | They may not work for specific governance preferences |
Most templates are pre-checked to comply with UK company law | They may not consider industry-specific regulations or needs |
If your company requires tailored help, consulting a legal expert or small business solicitor to customise your articles is advisable.
What are the legal effects of articles of incorporation?
Articles of incorporation are legally binding on the company, its shareholders, and directors. Failing to adhere to the articles can sometimes result in penalties or even personal liability for directors. They have several other legal impacts, including:
Contractual obligations: Articles create a contract between the company and its members. Breaching these terms can lead to legal action.
Governance compliance: Directors must operate within the powers granted by the articles. Acting beyond these powers (ultra vires) can render decisions invalid.
Dispute resolution: Articles provide a reference point for resolving internal disagreements, reducing the need for court intervention.