What is the model articles of association? (With FAQs)
Starting a company is a multistep process that involves registering a business entity and setting up its operations and documentation. One of the most important documents for a company is the model articles of association. Gaining an understanding of the key elements of this agreement is essential to making sure a business owner has control over the company's internal processes and decisions. In this article, we explain what the model articles of association is, discuss its importance and answer some commonly asked questions about it.
Related: 4 types of businesses to start
What is the model articles of association?
The answer to this question is essential for new business owners to understand. Model articles of association, also known as articles, is a document that describes the standard provisions that regulate how directors and shareholders run the company. According to the Companies Act 2006, it's one of two constitutional documents, the second being a memorandum, that the government requires a company to have. This relates to both private and public limited companies. Essentially, the articles is a contract between the company and its founding and running members.
Until 1st October 2009, business owners could adopt the standard articles, known as Table A articles, which were articles that the legislation updated. Since then, owners can adopt the standard model articles when incorporating a company, which the new legislation sets out. It's also possible for new company owners to purchase an articles package, which is a pre-designed agreement they can use.
The importance of the articles
Together with the memorandum, the articles of association are the first documents created when someone registers a company with Companies House. These two agreements form the company's 'constitution', which means they serve as guidelines for any future decisions or processes within the entity. The articles focus on explaining the following processes:
appointing and removing directors
for issuing shares
for selling and buying shares
for running and organising meetings with directors and shareholders
What to include in the articles of association
Typically, the articles of association is a single document that consists of various paragraphs, or sections, explaining the company's internal rules. Most agreements of this type focus on five key areas of business administration and development:
1. Liability of members
The first section focuses on explaining the shareholders' liability in case of financial or economic loss. For example, it's common to limit each member's liability to √Ç¬£1. This is the amount that each member contributes to the company's assets if a loss occurs.
The following section deals with the role of directors. It defines how many directors there are, discusses their responsibilities and powers and explains what processes they can use to make internal and external decisions about the company's operations. For example, this section often mentions that directors can delegate their powers to other members, and it then explains under which conditions this is possible.
Related: What are a director's responsibilities? (Plus salary info)
3. Shares and distributors
A separate section defines how many shares there are. It's also important to explain any rights attached to those shares and how to issue or transfer them. From a shareholder's viewpoint, one of the most important points in this paragraph relates to the dividends. Essentially, it explains the dividend payment process, for example, how often the company pays them to shareholders.
Related: Retained earnings formula (and how to calculate them)
4. Decision-making by members
The articles also defines various decision-making processes and explains how shareholders make important organisational choices for the company. For example, this section can mention the necessary number of shareholders that each meeting requires to be valid. It's also critical to define the voting process.
Related: 10 key business plan sections and why they're important
5. Administrative arrangements
Lastly, the model articles of association explains any other administrative arrangements that dictate what happens at a company. For instance, it can define how much notice to give shareholders and which means of communication to use. Most commonly, it also explains how the document signing process can look and that signing can only take place when there's at least one internal witness.
FAQs about the model articles of association
Learning about the uses and contents of the model articles of association is an essential element of developing strong business and entrepreneurial skills. Here are some frequently asked questions with answers that can help you gain a better understanding of the articles:
1. When is it better not to use the model articles of association?
The standard articles of association is a great starting point for many new businesses. For some new companies, it may be better to create and adopt a bespoke agreement. For example, a tailored arrangement may be a better option when the company:
gives digital notices and holds meetings online
issues multiple classes of shares
accepts alternate directors
restricts or grants additional powers to directors
2. How does a company owner receive the articles of association for the company?
Depending on the method chosen for incorporating a company, you typically receive the articles either by post or email. The articles that you receive from Companies House is a standard document. If you want to implement any changes in how the company handles its internal operations, you may create and provide a bespoke document. If you're going to use a custom agreement, it's necessary to submit that and register the company by post. This is because registering online is only possible for companies with model articles.
3. Is it possible to use the model articles of association for a company with one owner?
It's perfectly acceptable to register and run a company that has only one shareholder, who's also its director. Many private limited companies function like this. This means that it's possible to use the model articles for companies that have only one owner.
4. Can I change the model articles after the company has been running for some time?
Yes, changing the model articles is possible. For example, if you register a company and become its only director, then over time, your company grows, you might decide to expand it and engage additional directors. If something like this happens, you may choose to create an entirely new set of articles. Alternatively, if the change you want to implement is smaller, you also have an option to change the wording of some provisions.
5. Is it difficult to change a company's model articles?
The time and effort it takes to change the model articles depends on your company's structure. For example, if you're the only shareholder and director, the process can be fairly straightforward. If the company has many shareholders, it may be necessary for 75% of its shareholders to agree to the changes proposed.
6. Where can I check a company's articles of association?
It's necessary that all companies have a constitution, which includes both the memorandum and the articles. Anyone can access these documents via Companies House. Typically, you can view them for free. When accessing a company's constitution, you can also see any changes made to them in the past.
Additional tips for starting a business
Creating documentation and agreements is necessary, but it's usually not the only thing to consider when starting a company. Here are some additional tips to follow:
Recognise your strengths and weaknesses: Focusing on your strengths and weaknesses can help you decide what type of business to register. For example, you may determine that engaging an additional director may help you create a better organisational structure for the business.
Ask for help: If you're unsure about certain stages of registering or running a business, you may consider asking someone to explain these processes to you. You can also do this to understand how creating a bespoke articles of association works.
Create a straightforward plan: Although not every business requires a business plan, creating one is often helpful. An effective business plan can help you accomplish business objectives and help a company grow in the market.
Analyse the competition: Analysing competitors can be helpful both when you're defining your business offering and when you're thinking about creating a bespoke articles of association for it. For example, you can use the results of your research to assess which organisational strategy similar companies use.
Please note that none of the companies mentioned in this article are affiliated with Indeed.
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