Memorandum of association vs articles of association: what each document does

A UK limited company cannot be validly formed without a memorandum of association, and every limited company must also have articles of association. The two documents sound similar, and people often confuse them, but they do very different jobs, and it is worth knowing which one matters to you as a business owner. The memorandum is a short, one-off statement from the first shareholders that they want to form the company and become its members. The articles are the rulebook for how the company is run, and they stay in use for the whole life of the company.

What is a memorandum of association?

Before getting into the legal definition, it helps to think about the word itself. If you simply Google "define memorandum", you get something like "a written message in business or diplomacy". In short, it is something written down. That is not very specific, so the Companies Act 2006 fills in the detail.

Section 7 of the Act says that a memorandum of association is needed for a company to be validly formed. Section 8 then explains what a memorandum of association actually is. It is a written message stating that the subscribers, meaning the people who are subscribing for shares and looking to become shareholders:

• wish to form a company, so they intend to incorporate a limited company; and
• agree to become shareholders, or members, of that company.

To summarise, a memorandum of association is a written message from the people looking to set up a company, stating that they are looking to set up that company and that they wish to become members of it. It really is as simple as that.

The explanatory notes to the Companies Act, which you can find on the government's website, say that the purpose of the memorandum is limited. You can see that from how short the document is. But the intention behind it matters. The memorandum evidences the fact that these particular people intended to become shareholders and intended to form the company.

Why intention matters: a comparison with partnerships

A useful comparison is with something completely different: the general partnership. A general partnership is a business vehicle that is not incorporated and is not registered with Companies House. It can be created unintentionally. Typically, if two or more people come together with a view to making a profit and jointly carry on a business, a general partnership can come into existence whether or not they meant it to.

A limited company is different. There must be a written message from the shareholders stating very clearly that they intend to become shareholders and that they intend to form a company. The memorandum is that written message. Nobody ends up with a limited company by accident, and that is exactly what the memorandum is there to prove.

In practice, you will usually sign the memorandum as part of the incorporation paperwork and then never look at it again. It records a moment in time: these people, on this date, chose to form this company and to be its first members.

What are articles of association?

Section 18 of the Companies Act deals with the articles. Section 18(1) states that a company must have articles of association prescribing regulations for the company. "Regulations" here means the rules for how the company is to be run. So the articles of association are the regulations for the internal running of the company.

The explanatory notes to the Act put it in plain terms. They describe a company's articles as the rules chosen by the company's members, meaning the shareholders, which govern the company's internal affairs. Matters such as the directors' powers, how decisions are made and how the company is managed day to day are all covered by the articles.

This is the document that affects you in practice. When directors want to pass a resolution, when shares are transferred, when a new director is appointed, or when there is a disagreement about who can decide what, the answer usually starts with the articles. That is why I spend far more time with clients on the articles than on the memorandum.

Model articles of association on GOV.UK

Sometimes it is easier to understand what a document is by looking at one. The government publishes the model articles of association on its website. The model articles are, in effect, templates that the government gives you to use if you do not have bespoke articles, or do not want bespoke articles, for your company.

There are currently three main kinds of model articles:

• Private companies limited by shares. These are typically for-profit businesses, and this is the version most owner-managed companies use.
• Private companies limited by guarantee. These are typically clubs, societies and other organisations that are not really set up to make a profit.
• Public companies. These are the companies whose shares are traded on a stock exchange.

If you open the version for private companies limited by shares, you can read the articles online or download them as a Word document. You will see the defined terms at the start, followed by the actual rules themselves, set out article by article. Reading through them is the quickest way to get a feel for what articles of association actually cover. Again, in short, the articles are the rules for running the company.

One point to bear in mind: the model articles are a starting point, not a requirement. Many companies adopt them unchanged on incorporation and are perfectly well served by them. Others, particularly companies with more than one shareholder or with outside investors, replace or amend them with bespoke articles that reflect the deal the shareholders have actually agreed.

Memorandum vs articles: three key differences

When you put the two documents side by side, three differences stand out. They are the ones I would want a business owner to remember, because they explain why you can safely forget about one document and need to keep the other close to hand.

• When each document is used. The memorandum is only used on incorporation. It does its job at the moment the company is formed. The articles are used throughout the life of the company, every time a decision is made or a question comes up about how the company should be run.
• Whether each document changes. The memorandum is never really changed. Even if the shareholders change over the years, the memorandum stays the same, because it simply records who the original subscribers were. The articles of association, on the other hand, can be amended as time goes on and the needs of the company and its shareholders change.
• What each document does. At its core, the memorandum simply states who the initial shareholders are. The articles are the rules for how the company is to be run. They do not overlap: the memorandum is not a rulebook, and the articles are not a record of who the first members were.

If you remember nothing else, remember this: the memorandum says who formed the company, and the articles say how the company is run. One looks backwards to the moment of formation; the other governs everything that happens afterwards.

Next steps

If you are forming a company, the memorandum will be dealt with as part of incorporation and you are unlikely to think about it again. The articles deserve more attention, because they will govern how your company is run for years to come. Read the model articles on GOV.UK and check whether they suit your business as it is now and as you expect it to grow. If you want to amend them later, that can be done, but bear in mind that there are limits on what can be changed, so it is worth getting the articles right early rather than fixing them under pressure. Speak to a corporate solicitor if you are unsure which articles are right for you.