Understanding the Memorandum of Association: Definition and Key Components
Learn about the memorandum of association. This guide includes its definition, importance in company formation, and key elements. 5 min read updated on December 28, 2024
Key Takeaways
The memorandum of association (MoA) is the legal document required to set up and register a limited liability company (LLC). It states the company's aims, structure, and relationship with shareholders.
The MoA's main clauses are a name clause, registered office clause, object clause, liability clause, capital clause, and association clause.
It defines the legal scope of the company’s activities, protects shareholders, and gives the company a legal identity that shields members from personal liability.
The memorandum of association must comply with applicable jurisdictional laws and is mandatory in many jurisdictions; amendments usually require regulatory approval.
An attorney should prepare the MoA to ensure it is on point and legally sound.
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A memorandum of association (MoA) is a legal document prepared when forming and registering a limited liability company (LLC).
It contains several clauses:
A name clause
Registered office clause
Object (or objective clause)
Liability clause
Capital clause
Association clause
The MoA explains the LLC's relationship with its shareholders. Together, the articles of association and MoA form the company's constitution.
An MoA isn't required in the United States, but limited liability companies based in European countries, including the U.K., the Netherlands, France, and some Commonwealth Nations, require them.
This guide will discuss the fundamental details of MoAs, including what they must include and their role in company formation.
Purpose and Importance of a Memorandum of Association
The MoA sets out the legal boundaries for the company and its members, defines their relationship with external stakeholders, and provides a legal existence that shields members from personal liability for company actions.
As it defines the company's legal boundaries, it prevents members from taking actions outside those boundaries that might result in claims and even litigation, thereby providing the legal basis for all the company’s actions.
Key Components of a Memorandum of Association
A memorandum of association comprises several key sections, each serving a specific purpose:
Name Clause
This clause states the company's proposed name:
It must end in the word "limited" if it's a public company or "private limited" if it's a private company.
It can't be identical to any existing company's name.
It can't allude to the new company doing the business of an existing company.
It should not be misleading in any way.
Registered Office Clause
The registered office clause lists the name of the state where the company's registered office is physically located:
The registered office's physical location determines which jurisdiction the Registrar of Companies would fall under and which court the company would fall under.
It also confirms the company's nationality.
The registered office's full address must be provided to the Registrar of Companies to simplify further communications.
Objects or Objective Clause
The objects or objective clause is considered the most important in the MoA. It explains why the company was established.
Companies aren't legally allowed to do anything other than the kind of business stated explicitly in this clause:
It defines and limits the scope of the company's operations.
It details the company's scope of activity for the members and explains how the members' capital will be used.
It protects shareholders' funds and ensures they will be used for the specific business purposes for which they were raised and will not be risked in other endeavors.
An object clause should contain:
A list of the main objects the company will be pursuing after it's Incorporated
Incidental objects that are necessary to achieve the main object
Any other objects that aren't included in the main objects or incidental object
Nothing illegal
Nothing that's against the public interest
Nothing that's against the country's general rule of law
Liability Clause
The liability clause explains what liability each of the company's members faces. If shares limit the company, each member's liability can be no more than the face value of shares they hold.
If the company is limited by guarantee, this clause must define how much liability each individual company member holds. This clause would not be included in the MoA if it's an unlimited company.
Capital Clause
The capital clause lists information about the total capital held by the proposed company. This amount is called the company's authorized capital. Companies can't collect more money than the amount listed under authorized capital.
The capital clause must also list how the capital is divided into equity and preference share capital.
The MoA must include the number and value of shares the company puts in equity share capital and preference share capital.
Legal Requirements for a Memorandum of Association
The memorandum of association must comply with legal requirements, such as the format and content prescribed by company formation laws, and follow the law of the land.
It is compulsory in many jurisdictions (for example, the European and Commonwealth countries) and must be filed with the Registrar of Companies or any other relevant registry.
It is scrutinized to ensure compliance with legal requirements.
As such, any changes must be approved by special resolutions (such as resolutions passed by 75% of members at a special meeting as opposed to 50%), shareholders’ approval, and, in some cases, government consent.
Compliance is a criterion for maintaining a company's legal status.
Differences Between Memorandum of Association and Articles of Association
The memorandum of association and articles of association (AoA) are the two key corporate governance documents, each serving a different purpose.
What Is the Difference Between the Articles of Association and the Memorandum Of Association?
While the MoA concerns the company’s external affairs, the AoA concerns the company’s internal affairs.
The MoA states the company’s objects and powers and its relationship with the shareholders and external parties.
The AoA, on the other hand, sets out the rules and regulations for conducting meetings, appointing directors, and ensuring shareholders' rights.
If the MoA determines the scope of the company’s activities, the AoA sets up the rules and regulations to ensure smooth internal operations.
Why Every Business Needs a Memorandum of Association
A memorandum of association is an important document for any business. It clearly outlines the company’s functioning and protects investors' interests.
It ensures the company is formally established with a clear purpose and that everything it does is within this purpose. The MoA also helps the company secure investors' confidence by laying down its purpose and structure.
For other parties who are external to the company, such as creditors, the MoA provides clarity about the company’s functioning and, therefore, makes it easier for them to trust the company.
Conclusion: Drafting a Comprehensive Memorandum of Association
When you have a lawyer draft your memorandum of association, the document will accurately reflect your business's objectives and structure and the scope of your operations under the laws of the jurisdiction where your company is established.
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FAQs
What Is the Memorandum and Articles of Association For?
The MoA is a company’s charter. It defines its objectives, structure, and relationships with third parties.
The AoA governs the company’s internal affairs, setting out rules for holding shareholder meetings, appointing directors, and distributing profits. Together, they create a company’s legal and organizational framework.
Can MoA Be Altered?
The MoA can be amended, but this requires a special resolution of the shareholders and, in many cases, the consent of the regulator or the government.
The process depends on the particular provision being altered, for instance, the company name, the registered office, or the company’s objects.
Are Articles of Association the Same As Bylaws?
Articles of association are similar to companies what bylaws are to non-corporate entities and smaller organizations.
Although both are internal management rules followed by organizations to manage their affairs, bylaws are relatively informal, non-legal documents.
AoAs are more formal and binding documents filed with the Registrar of Companies.