Articles of Association act as your company’s internal rulebook. They set out how the business runs and define the roles of directors and shareholders.
They create a clear structure for decision-making so everyone involved understands their rights and responsibilities from the outset. Additionally, the Articles help prevent misunderstandings, with guidance on how to handle common situations within the business.
The Articles usually cover:
- How directors make decisions
- How shareholders vote
- How meetings take place
- How shares are issued or transferred
- How directors are appointed or removed
- How profits are distributed through dividends
Why Articles of Association are Important
When you set up a limited company, you must prepare your Articles of Association and the Memorandum of Association. These documents form the foundation of your business and guide how it operates from day one. Without them, your company would lack structure and direction.
Articles of Association also reduce the risk of disputes between directors and shareholders. Because the Articles are legally binding, all company officers must follow them at all times. If they fail to do so, decisions may noy stand if challenged.
Memorandum vs Articles of Association
While both documents form part of company formation, they serve different purposes.
- The Memorandum of Association confirms that the founding members agree to form the company
- The Articles of Association explain how the company will run on a day-to-day basis
You submit both documents to Companies House when you register your company. However, you cannot update the Memorandum after incorporation, as it acts as a historical record. In contrast, you can amend the Articles when needed.
Where to Find Your Articles
You can usually find your Articles in several places. You must also keep track of the correct version.
Common locations include:
- The Companies House public register
- Your company’s incorporation documents
- Your statutory records or minute book
- Copies held by your legal advisor
You should always check that your internal copy matches the version filed with Companies House. This helps avoid confusion and disputes.
If the versions differ, you should correct the issue promptly to ensure your company follows the correct rules.
Clauses in Articles of Association
While each company may tailor its Articles, most include similar clauses.
1. Authority of Directors
The Articles define what powers directors hold. They also confirm whether directors need shareholder approval for certain decisions. This section ensures that directors act within agreed limits and also protects shareholders from unauthorised actions.
2. Decision-Making Rules
The Articles explain how directors make decisions. For instance, they may require a majority vote or unanimous agreement. They also set rules for meetings, including quorum requirements and voting procedures.
3. Appointment and Removal of Directors
The Articles outline who can appoint and remove directors. This process often involves shareholders.
4. Directors’ Remuneration
Some Articles allow directors to set their own pay. Others give shareholders control over salaries.
5. Share Transfers
The Articles often restrict how shareholders transfer shares. This helps prevent unwanted third-parties from gaining control. In some cases, existing shareholders receive first refusal before shares transfer to outsiders.
Model vs Bespoke Articles
When you form a company, you can choose between Model Articles or bespoke Articles. Each option suits different business needs.
Model Articles
These follow a standard format set out in the Companies Act 2006. They apply automatically unless you choose to amend them. They suit many small businesses with simple structures and offer a quick starting point. However, they may not cover more complicated situations as your business grows.
Bespoke Articles
These tailor the rules to your business needs. They can include detailed provisions for investors, share classes and decision-making. They also align with other agreements, such as shareholder agreements.
Changing the Articles
You can amend your Articles as your business evolves. However, you must follow the correct process.
In most cases, you must:
- Pass a special resolution with at least 75% shareholder approval
- File the updated Articles of Association with Companies House within 15 days
- Update your company records to reflect the change
You can pass this resolution either in writing or at a general meeting. Both methods remain valid.
Importantly, any changes must benefit the company as a whole. You cannot introduce changes that unfairly disadvantage certain shareholders.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.