Starting a business with partners or friends is probably the easiest way to launch a company. You access funding from various individuals and rely on the expertise and experience of knowledgeable individuals.
Besides its many benefits, registering a company with multiple directors and shareholders is more complex than a solo entrepreneur. Unlike a sole contractor, you need two additional crucial documents to register your company in the United Kingdom.
The memorandum of association and articles of association act as the company’s official birth certificate and its master rulebook. You can’t have a legal entity or open a corporate bank account without them.
This guide explains these documents plainly and simply. You will also discover their functions, why they protect your ownership, and how they keep your business running smoothly without conflicts.
What Is a Memorandum of Association?
Both the memorandum and articles of association play a significant role when establishing a business. The memorandum of association is a simple document that confirms your decision to start the company. It is signed by the most important individuals or representatives of the establishment, usually the original owners.
You can summarize the crucial functions of this document into these:
- It is a historical record: Once the government registers your company, you cannot change the contents of the memorandum.
- The signatures are permanent: The names of the original owners or founders remain on the document forever. In a way, you remain part of the business even if you sell your share to someone else decades later.
- It lists the starting shares: Signing the document proves that each founder agreed to take at least one share when the business started.
Think of it as a snapshot of the exact time a company came into existence. It does not contain any of the daily rules for running the business. All it does is prove that you and your partners officially created the company together.
The Main Rules inside the Articles of Association
Think of it this way: if the memorandum is the birth certificate, the articles are the school rulebook.
The articles of association serve as the internal rulebook for running the company. This document is a legal contract that everyone in the company, including the owner, must follow.
Inside this rulebook, you will find clear instructions for daily operations:
- How executives make decisions: It explains what the directors can decide on their own and when they must involve the shareholders through votes.
- How they run and schedule meetings: It sets the rules for inviting people to meetings and counting the votes.
- How stakeholders share profits: It details how and when the company can pay out money to the owners.
- What happens to shares: It outlines the rules for selling your shares or giving them to a new partner.
Without these rules, a business would quickly become chaotic. For instance, if two partners argue about how to spend company money, they do not have to fight. They simply open the articles of association to see what the law says. This document guides operations as well as resolves conflicts before they arise.
How Model Articles Compare to Custom Drafts
When registering your company for the first time, a copy of the signed articles must be ready for submission. To simplify this process with easy registration for small companies, the government automatically gives you a set of prewritten or model articles.
Model articles are perfect for small businesses, especially those with only one owner. They are basic and safe, requiring no extra drafting. However, they do not offer much protection if you have multiple partners.
Businesses with more than one owner should draft custom articles. You can add specific rules to protect yourself since the model articles are generic.
For example, you can write a rule that says if a partner wants to leave, they must offer to sell you their shares before considering an outsider. This keeps unwanted third parties from taking over your company, moving the organization away from your vision.
How to Change Your Rules after Registration
Unlike the memorandum, the law permits you to change your articles of association. An upgrade of this document will be necessary as your business grows. Under UK law, the formal steps for altering the contents of the Articles involve the following:
- Write down the changes: You must draft the new rules in clear terms that everyone can easily understand.
- Hold a shareholder vote: The decision must be collective. Changing the rules must pass through a vote after you have called an official meeting according to the bylaws.
- Pass a special resolution: You don’t need every shareholder to agree. If at least 75% of the shareholders vote in favor of the new rules, the new law can be updated.
- Send them to the government: After getting the “green light” from the shareholders, you must send the updated articles to Companies House within 15 days of the vote.
Once the government approves the new document, the public records are updated, and the new rules take effect.
How an Incorporation Agent Can Help Create Your Documents
Although you can draft your incorporation documents yourself, many who try eventually make errors. The more errors you make, the more you delay your business launching ambitions.
Working with an incorporation agency to streamline the incorporation process without errors is now the industry trend. Instead of wasting hours trying to understand requirements and legal jargon on government websites, hire an expert.
A skilled professional is always available to draft your memorandum and articles of association correctly so that Companies House accepts them on the first try. They will organize your shares, submit digital files, and ensure that your name is legally available.
Incorporation agents can also help you further beyond incorporation registration. If you need airtight bylaws to protect you and your partners, they can also help you develop a unique one rather than just downloading a default template.
Conclusion
The memorandum and articles of association highly protect business owners from day one with so much ease. With these documents signed, you don’t have to worry about how to manage multiple partners with unique personalities and egos.
Whether you need direction for expansion or you want to resolve internal conflicts, the articles of association can save you from legal or financial troubles. Meanwhile, the memorandum keeps your name forever etched on the sands of your brainchild. Just follow the bylaws to secure your bank account, eliminate guesswork, and watch the company move in the right direction.
To make sure your new business starts on a firm legal foundation, allow a professional team to quickly set up your memorandum and articles of association.
References
https://www.gov.uk/limited-company-formation/documents
https://www.gov.uk/make-changes-to-your-limited-company/get-agreement-from-your-company
