Articles of Association Meaning

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It is the rule book of any company that covers the regulations, and operational guidelines to follow within the organizational premises to achieve the business goals and objectives. In addition, the articles are different from the Memorandum of Association, which defines the business objectives and the conditions of the company’s formation.

Key Takeaways

  • Articles of association form a document that companies must file with the government to enjoy a legal status in the corporate sector.It acts as a user manual for the corporate entities in the event of doubts or questions regarding the standard rules and regulations to be followed.Company details, purpose, duration, share capital, power distribution, shareholder meetings, and company organizations are some of the AOA contents.While AOA helps companies operate per the rules and regulations to achieve the goals, the memorandum of association (MOA) lists those objectives.

Articles of Association Explained

The articles of association constitute a set of guidelines that companies and their staff members, from board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more to executives, need to follow. Every company should have an AOA as a guide to refer to before making any minor or major business decision. Whether companies want to know the process of appointing a director or executive or they are to decide the number of shares to issue, going through this document helps them proceed in a sequence.

There are default standard formats or model articles of association that most companies use. However, the businesses have the liberty to make changes in the same as per their individual company requirements. The model articles provide a base for the small companies to which they make further changes during the incorporation process. Furthermore, the Company Act 2006 offers different model AOAs for businesses set up in the UK, which apply to the private companies limited by shares and guarantees, and public companies limited by shares (PLCs).

In the AOA, the companies include all pieces of information, like the rights of the employees from directors to executives, limited liability members, the decision-making protocol, the powers and duties of the directors, their appointment process, the steps to approve and issue dividends, the requirements of the general meetings and board meetings, voting rights, etc. 

Above all, filing the AOA with the government and getting it approved by the authorities is important as it makes the business entities enjoy legal status in the corporate industry.

Contents

The contents of articles of association vary from company to company, given their requirements. However, there are some of the aspects that are covered in all AOAs being filed with the government for approval. 

Company Details

The first one is the details of the company. All basic information is provided under this separate section of the AOA, from the name of the entity to the name of the incorporators and their addresses. As far as the company’s name is concerned, every government has a different format that the corporate entities need to follow. Thus, they must name it per the standards.

Purpose

When a business is incorporated, it is done with a purpose. The AOA has this section for the incorporators to mention the business goals. It is an important segment of the document, which the government authorities look into in detail. Thus, the owners must outline how the business would carry out the day-to-day tasks.

As the operational aspect of the company is likely to be noticed with much attention, this section keeps everything clear. This, in turn, shows the clarity in the incorporators’ minds, which makes the document easy to read and understand for further approval from the authorities.

Duration

The duration of the purpose or company formation also requires specific mention. Some entities form themselves for a specific reason, and once that is fulfilled, they pull it out. Here, the companies mention whether the incorporation is seasonal or for one particular objective for a limited period, or permanent. 

Power Distribution

Delegation of power is necessary for companies if they aspire to run in an organized manner. Hence, they have a hierarchy of staff from the management to anyone working there. The distribution of powers is the section that deals with this aspect of incorporation. The hierarchy-wise roles and responsibilities of individuals are mentioned in this segment.

Company Organization

The AOA gives details about the number of employees and directors, along with other information related to the company’s organization. In addition, the details of the shareholders, founders, investors, auditors, etc., are found in this section. 

Share Capital

The rights they all enjoy in the company are briefed herein. Thus, the AOA lets the authorities understand the management of the share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more by the companies. Also, it includes the information regarding the alteration that occurs in the share capital, calls on shares, shareholders’ rights, voting rights, preference sharesPreference SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more, etc.

Shareholder Meeting

This section contains the requirements of the general or director meetings. In addition, the rules that govern the annual meeting of shareholders are found here, along with the notices, resolutions, and votes.

Importance

AOA helps companies have a rule book to refer to whenever they require it. The document acts as a user manual that guides every employee in case of minor or major queries as it contains all rules and regulations that all management and employees must follow.

When businesses prepare the AOA, it is easier for them to apply for different loans for approval. Plus, they can have a new business account opened instantly. In addition, this document makes the government recognize the entity as a corporate player, and it gets legal recognition in the region it operates and beyond. Furthermore, the AOA keeps the personal assets of the incorporators separate from their business assets.

Example

Here is the articles of association sample for example:

SOURCE

Memorandum of Association (MOA) vs AOA

Memorandum and articles of association seem and sound similar, but they differ widely. Though both these documents are necessary for companies to have during their incorporation, the owners hardly understand the difference between them.

While a memorandum of association specifies the objectives and conditions of the formation of the business, articles of the association form the rules that govern the operational aspect fit for the organizations to achieve the set goals.

So, let’s have a look at the differences in a tabular form below:

This is a guide to what is Articles of Association & its meaning. Here we explain its mechanism, contents, sample, importance & differences with MOA. You can learn more about financing from the following articles –

These are a legal document that prescribes rules and by-laws for the company and acts as a document that define the responsibilities of directors, the kind of business to undertake, rules for issuing shares, etc. In addition, it contains the details relating to other company details, including the purpose, duration, share capital, power distribution, shareholder meetings, and company organizations.

The AOA can be amended and altered based on the company requirements by discussing the changes in the board meeting and passing a resolution specifying the same. The approval of the shareholders is required for the new modifications to be active.

Yes, these are the legal documents specifying the laws and regulations that companies must follow while operating to achieve their goals. The legal authorization makes them an authentic player in the corporate sector.

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