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How to draw up a memorandum of association and what to put in it?

The basis for the existence and functioning of a limited liability company is the memorandum of association. However, we are often confused about what should be included in it. What are its obligatory elements and what is good to include in the contract, even though the law does not force us to do so?

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Chapters of the article

If we want to set up a limited liability company, we need to draw up a memorandum of association. Only if we do not plan to have any other shareholders, the deed of incorporation is its equivalent. Although the company may have other documents to regulate its operation, this is not something that is prescribed by law. Unlike a memorandum of association, which is necessary. Its contents matter a great deal and trying to carefully word each provision can save us a lot of grief in the future. Fulfilling the letter of the law by copying a memorandum of association from our friend’s company or from a template found on the internet is not a happy idea.

The basic purpose of the articles of association is to define the basic relations in the company, in particular to determine the types and amounts of shares of individual shareholders and possible dispositions thereof, to define the scope of the individual bodies of the company and to determine their powers.

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Memorandum of Association for a newly established company

At the time of incorporation, the memorandum of association should state who the first managing director(s) of the company is (are), how the deposit obligation of the founders of the company will be regulated (including the time limit for its fulfilment) and who will become the administrator of the deposits. In case a non-cash contribution is made to the company, the agreement shall include a description of the contribution, its valuation and the appointment of an expert to value it.

The articles of association usually also include the conditions for the disposal of individual shares, both between the shareholders and to third parties, or the determination of the rules for increasing or decreasing the share capital.

Do not forget the legally required form of notarial deed.

However, after the company has been formed (or after the deposit obligation has been fulfilled), the above-mentioned information does not have to be in the articles of association and may even be omitted.

Tip: Are you one of the shareholders of a limited liability company and you no longer want to participate in the running of the company? The law offers several options for terminating participation, which we have focused on in our blog article. What are their advantages and which one to choose?

What about the articles of association of an existing LLC?

Again, it is necessary to consult the laws, namely the Civil Code and the Commercial Corporations Act, which specify the other necessary requirements. These are:

  • theregistered office – it is not necessary to go into great detail, it is even sufficient to have only the name of the municipality (e.g. Aš or Bruntál) – this is useful when moving later within the same municipality, when there is no need to change the articles of association,
  • company name – i.e. the business name under which the company is registered in the commercial register and under which it trades and does business,
  • thesubject of the company’sbusiness or activities – in particular for activities carried out under the Trade Licensing Act, but also for activities carried out on the basis of authorisations under other regulations (e.g. carpentry, gardening, building work, etc.)
  • identification of the shareholders – by indicating their name and place of residence or registered office if they are legal persons,
  • identification of shares, if the shareholder may own more than one share under the articles of association,
  • thename of the type of share and the rights and obligations attached to it, if the articles of association provide for and allow more than one type of share,
  • theamount of the contributions attributable to the shares,
  • thenumber of managing directors and the manner in which they act for the company,
  • the amount of the share capital – in the case of a limited liability company, compared to the previous regulation, the amount of the share capital is now set at a minimum of 1 koruna, but even if you want to stick to the ground, a share capital of at least several tens of thousands of koruna is recommended. This may have an impact on the later acquisition of credit and on the confidence of partners or clients.

Tip: What does a business share in a company mean, what rights and obligations are associated with it and how can the share be transferred or otherwise disposed of? We have looked at this in our next article.

Optional part of the social contract

The law is not very strict as regards the mandatory elements of the articles of association and many of the details are at the disposal of the founding members (or later generally the shareholders). Some things can be added over and above the law, and some things can even be derogated from.
In this respect, it is very important to consider in advance the system of operation of the company. A small family “company” where you know in advance that it will never have more than two or three members will have a completely different set-up. A different approach will be required for a project that aims to accommodate a lot of shareholders, allowing for exchanges, sale of shares, etc. There are a plethora of options, and for those who have not been part of a similar company before, it is certainly advisable to entrust its creation in the hands of an expert. Each variant deserves an individual approach.

As an optional component, you can set up, for example, the payment of profit shares among the partners, limitation of executive powers, or allowing the establishment of a reserve fund.

The question arises: which of the optional offers should be included in the articles of association? Or is the legal minimum sufficient? However, there is no clear answer here. Again, it is necessary to ask about the way the company operates, the expected number of shareholders, the object of the business, etc.

Generally speaking, in addition to the legal minimum, it is usually best to provide in the articles of association for the possibility of transferring the share to another shareholder and/or to a person who is not a shareholder, the shareholders’ pre-emptive right to the transferred share and the conditions for inheritance of the share. It may also be recommended to provide for the method of determining the amount of the settlement share upon termination of a shareholder’s participation in the company during its existence and for matters beyond the scope of the law to be decided by the general meeting by a qualified majority. It is also worthwhile to provide for the possibility of shareholders’ decision-making outside the general meeting, so-called per rollam, which makes it possible to amend the articles of association without the need for a public deed (notarial deed), or other special requirements corresponding to your business plan.

Amendment of the articles of association

Amendments to the articles of incorporation and the articles of association are made by notarial deed or by per rollam decision-making if the articles of association allow it.

Typical amendments we encounter are:

  • Change of the registered office – as we mentioned above, it is worthwhile to refer to the registered office only as the name of the municipality. When moving within the municipality, there is no need to amend the agreement, just record the change of address in the commercial register.
  • Change of company name – again, it is necessary to choose a wording of the company name that the commercial register or notary will consider acceptable, i.e. sufficiently different from the already registered entities.
  • Change of the object of business.
  • Change of managing director vs. change in the number of managing directors – notarial registration is only required if the number of managing directors is changed, not just the person of the managing director.
  • Increase and decrease of share capital – must be made by notarial deed.
  • Changes in partners or shareholder, amount of business share- is a change in the company which is dealt with by a contract of transfer of business share between the buyer and seller. A notarial deed is required if the transfer must be accompanied by a division of the existing shareholding.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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