Definition
The Memorandum of Association, a key document in company formation, outlines the proposed firm’s relationship with shareholders and specifies its objectives, authorized share capital, and type of business. On the other hand, the Articles of Association govern the internal affairs of the company, acting as a rulebook for the operation, management, and procedural matters. Essentially, the Memorandum of Association defines the company’s purpose and capacity, while the Articles of Association specify the company’s governing rules and regulations.
Key Takeaways
- The Memorandum of Association is a key legal document of a company that essentially lays out the foundation on which the company is built. It includes important information about the company’s name, its purpose, its registered office address, liability of its members, and share capital if a company chooses to have any.
- The Articles of Association, on the other hand, is a document that sets out the rules for internal management of the company, conducting its business, and carrying out its operations. It comprises provisions relating to the right, duties, responsibilities of the members, directors and various other stakeholders involved with the company.
- In simple terms, while the Memorandum of Association outlines the scope and limitations within which a company must operate, the Articles of Association are more concerned with the governance and internal management of the company, kind of like a by-law of the company’s daily functioning.
Importance
The Memorandum of Association and the Article of Association are crucial components in the formation of a company, with each serving unique roles. The Memorandum of Association outlines the company’s relationship with the external environment, outlining its objectives, scope of operations, and name of the company, among other aspects.
It provides the foundation upon which the company is built and declares the capacity in which it will operate. On the other hand, the Article of Association details the company’s relationship with its internal environment, including shareholders and directors.
It outlines the regulations for the company’s operations, rights and obligations of members, and procedures for making corporate decisions. Understanding the differences between the two can help in the management and operation of a company, from policymaking to dispute resolution.
Explanation
The Memorandum of Association and the Article of Association are two essential documents that form the legal and regulatory backbone of a business. The purpose of a Memorandum of Association is to delineate the relationship between the company and the outside world. This document outlines the conditions upon which the company is allowed to operate.
It establishes key aspects such as the name of the company, its purpose, and its limited liability status. In other words, it showcases the scope of activities a company can undertake. This document is crucial when registering the company with the authorities and is open to public viewing.
On the other hand, the Articles of Association serve to govern the internal affairs of the company, guiding its day-to-day operations. This document sets out the rules and regulations for decision making, allocation of responsibilities, and procedures to be followed within the organization. It covers a wide range of topics, including the issue of new shares, conduct of company meetings, voting rights of shareholders, and directors’ powers.
The Articles of Association, therefore, provide an operational roadmap for the company’s management, ensuring the harmonious running of business activities as well as smooth functioning between the stakeholders. These rules can be amended from time to time by the shareholders, depending upon the company’s changing needs and growth trajectory.
Examples of Memorandum of Association vs Article of Association
Startup Incorporation: Suppose three friends want to start a tech startup and need to establish themselves as a legal entity. They would begin by creating a Memorandum of Association, which would outline key information about their business like its name, where it would be located, and its purpose (to develop innovative technology solutions, for example). The Articles of Association, on the other hand, would detail how the company will be run, the roles and responsibilities of the directors, the voting rights of shareholders, and how financial records would be kept.
Expansion of Business: Consider a scenario where an existing company wishes to expand its current operations to another sector or overseas. To do so, they need to alter their Memorandum of Association to include the new object clause. However, the procedural changes such as decision making on business expansion, and how the profits from the new business would be distributed among stakeholders would be governed by the updated Articles of Association.
Nonprofit Organization: In the case of a nonprofit organization, a Memorandum of Association would declare the name of the organization, the registered office address, and the non-profit’s mission (for example, helping children in poverty). The Articles of Association, however, would detail how the nonprofit is governed, including how board members are elected, how meetings are conducted, and the way decisions are made.
Frequently Asked Questions: Memorandum of Association vs Article of Association
What is a Memorandum of Association?
A Memorandum of Association is a legal document that defines the relationship between the company and an outsider. It outlines the fundamental conditions upon which the company is operated. This document specifies the company’s objectives and its scope of operations.
What is an Article of Association?
An Article of Association, on the other hand, governs the internal management of the company, outlining the regulations for routine activities, processes, and decision-making processes. The content of the Articles of Association can be amended by the owners of the company.
What is the difference between a Memorandum of Association and an Article of Association?
The main difference between these two lies in their role and content. While Memorandum of Association focuses on the relationship between the company and outsider, Article of Association deals with the internal management of the company.
Can companies operate without these documents?
No, both Memorandum of Association and Article of Association are essential documents that are required for the registration and operation of a company. They play a crucial role in the legal functioning of a company.
Can Articles of Association be changed?
Yes, unlike the Memorandum of Association, the Articles of Association can be amended by the shareholders, provided the changes are approved by a specific percentage of owners, typically requiring a special resolution.
Related Entrepreneurship Terms
- Corporate Governance
- Mandatory Provisions
- Company Formation
- Roles and Responsibilities of Shareholders
- Company Bylaws
Sources for More Information
- Investopedia: An excellent resource for all business and finance related definitions and articles. Their in-depth articles provide comprehensive information.
- Accounting Tools: This site offers concise and easy to understand explanations of finance and accounting terms and concepts.
- Corporate Finance Institute: A professional site that provides wide-ranging corporate finance information, online courses, and certification programs.
- The Balance Small Business: A reliable site presenting both management and financial information that caters particularly to small businesses.
