Time for the next installment in my attempt to document the sometimes opaque world of setting up a company, based on experiences founding Foam Kernow. As before ‘I Am Not A Lawyer’, as they say – so no substitute for proper legal advice here, and any corrections would be most welcome. See part 1 about the motivations for non-profit vs shareholder companies.
Companies in the UK are founded with two documents, the ‘articles of association’ and a ‘memorandum of association’.
The articles of association broadly has two purposes. One is to state why the company has been brought into existence. The other is to strictly define the decision making process for those involved. You don’t generally need to write these documents from scratch, as we are provided with ‘model articles’ from which we can base new companies easily.
The company’s objects
A non-profit needs to describe it’s purpose via ‘objects’. This is important because, as explained in part one, a non-profit is strictly controlled in terms of access to its money. The objects describe what the company assets (e.g. cash) can legitimately be used for. You can’t found a non-profit for running e.g. a school and use it later for selling cars.
In contrast the objects for a company with shareholders is to provide a return on the investment for those shareholders, no more and no less. As such, for-profits do not need to provide any objects.
Articles of association are on the public record (you can pay Companies House £1 to send them to you). Naturally I’ve uploaded Foam Kernow’s articles on github These are based on the UK’s model articles – the main addition are the objects, which are a distilled version from Foam Brussels’ charter:
The objects for which the Company is established are to:
1.11 promote art, science and education by identifying and strengthening the areas that connect them;
1.12 embrace cultural change;
1.13 foster interdependence;
1.14 cultivate the beginner’s mind;
1.15 respecting and sharing sources;
1.16 empower participants to translate an idea into practice;
1.17 foster open source culture; and
1.18 embrace creative conflict.
So in a nutshell, the objects provide a publicly stated purpose and philosophy, such as this, for everybody involved.
Object 1.11 (the numbering scheme irks me as a programmer) was added in order to underscore the arts/sciences purpose of foam. This meant we could apply for an exemption to drop ‘limited’ from the end of the name, in order to highlight our independent research focus.
Memorandum of Association
The memorandum is an agreement between the individuals founding the organisation – the share of capital (in a for-profit) or the share of liability (in a non-profit), the names and addresses – and eye colour, interestingly of all involved.
The standard corporate structure in a company limited by guarantee is a democratic one consisting of two levels. ‘Directors’ of a company take day to day decisions and responsibility while ‘Members’ of the company have voting powers on important decisions and have the ability to remove or add new directors. This structure is very flexible, neither directors nor members need to be employed by the company, and alternatively it’s also possible for a company to only have a single director/member who is also employed on the payroll. This is how foam kernow started, and bizarrely I had to supply minutes to Companies House for a meeting with myself to appoint a new director.
There is quite a lot of confusing terminology around all this, for example an ‘executive’ director is one that is employed by the company (also known as a CEO) while a ‘non-executive’ is one that is otherwise external to the company.
As an aside, some companies are wholly owned by their employees, where all people on the payroll are made members and given votes automatically – however this is not the norm.