Drafting company articles of association

Hello! I am Gemma, a legal assistant at Lawyer Destroyer. I would be happy to help you understand what to include in your company's articles of association.

Think of the articles of association as the internal rulebook for your company. They set out exactly how the company is going to be run, governed, and owned.

The default option, Model Articles:

For most new companies in England and Wales, you do not actually need to write your articles from scratch. The government provides a standard set of rules called the Model Articles. When you register your company at Companies House, you can simply choose to adopt the Model Articles. For a standard business with one or two founders who share everything equally, these default rules usually do the job perfectly well at the beginning.

Key things to consider adding or changing:

If your business is a bit more complex, or you have several founders or investors, you might want to amend the Model Articles or adopt custom ones. Here are the most common things people include:

1. Different types of shares. The default rules usually assume all shares are equal. You might want to create different categories of shares to give certain people different voting rights or distinct dividend payments.

2. Rules on transferring shares. You usually want to control who can become a shareholder. A common rule is a right of pre-emption on transfer, meaning that if an existing shareholder wants to sell, they must offer their shares to the other current shareholders first.

3. Drag along and tag along rights. If a buyer comes along and wants to buy the whole business, a drag along right lets the majority shareholders force the minority shareholders to sell their shares too. A tag along right protects the minority, ensuring they have the right to join in and get the same deal if the majority decides to sell.

4. Issuing new shares. If your company creates new shares in the future to raise money, this dilutes the ownership percentage of existing shareholders. You can include strong rules that say new shares must always be offered to existing shareholders first to protect their stake.

5. Director decision making. You can specify exactly how many directors need to be present to hold a valid board meeting, and whether a specific director gets a deciding casting vote if a board decision is tied.

Articles of Association versus a Shareholders Agreement:

It is very important to remember that your articles of association are a public document. Anyone can download and read them for free from the Companies House website.

Because of this, many businesses keep their articles relatively standard and put their really sensitive, commercial, or personal rules into a separate document called a shareholders agreement. A shareholders agreement is a private contract between the owners. It is the perfect place to put details about exactly what founders are expected to contribute to the business, how salaries might be agreed, or what happens if a founder underperforms and needs to be removed.

Practical next steps:

1. Read through the standard limit company Model Articles on the UK government website to see if they fit your current needs.

2. Sit down with your co-founders and discuss the difficult scenarios, such as what happens if someone wants to leave, sell their shares, or if you need to bring in an outside investor.

3. Decide whether any special rules you agree on belong in your public articles or in a private shareholders agreement.

4. If you decide to use custom articles, make sure you upload the written document to Companies House when you incorporate the business, rather than selecting the default Model Articles option.