Memorandum of Association (MoA) is an integral and important document associated with Limited companies. Entrepreneurs are generally puzzled as to what constitutes a good MoA and how should we draft it.
To simply put it in a line, MoA is a document which captures what activities your company can do.
Many entrepreneurs are of the view that we should be able to do almost anything under the sun, many want a much focused MoA and are sceptical that including many activities might be viewed as a defocussed company by future investors/ stakeholders. Both the approaches are extreme and it might be useful to take the mid-way at times.
When we start a business, we start with an idea and are typically passionate about doing that only. During the lifecycle of the business, the idea may need changes to align with market needs, feedback and accommodate new opportunities. Take the case of Flipkart. It started with selling books online but today they are selling a diverse set of products and also doing a decent amount of building supporting infrastructure, distribution chain etc.
Here are few points which may help you to decide on a MoA which has ample flexibility to accommodate the vibrant nature of the world today:
- Major Focus areas (Main objects) – Every company should have a strong flavor of what you wish to do in the immediate future. This also impacts the name of your business, as registering authorities look at this to decide whether your proposed name is in consonance to the main objects. E.g. Reliance Telecom Ltd – from name you can make out that this company may be in telecom related domain. Reliance Industries Ltd suggests something related to manufacturing. Reliance Capital Ltd suggest an activity in to finance or capital markets. Similarly if you look at words like systems, infotech, labs, solutions, technology etc. you guess that this may be a company focusing on IT related activities and not on trading or manufacturing or some other sector.
- Including generic terms– It may be a good idea to present your activities in a little more generic term instead of very focused or narrow words. E.g. If you are going to be in IT domain, you can use the generic words like IT, software, hardware, web etc. Look at these 2 small intercept of objectives:
- The company shall focus on designing & creating videos, problem solving techniques & tutorials to help improve mathematical skills of students.
- The company shall focus on design, development, architecting, creating videos, interactive programs and other contents to help improve problem solving skills, personality development, IQ enhancements and put these skills to practical use by using innovative tools & channels of IT, web, mobile and other online & offline techniques & tools to cover wider set of audience in India & abroad.
- Supporting activities – List of activities which support or play an important role in supporting your main objectives. E.g. ability to enter into tie-ups, agreements, contracts etc., ability to buy shares, form companies, acquire IPs, takeover, merge, indemnify officers of the company, form trusts, associations etc., bid for tenders, open offices in other countries, do international business etc.
- Social responsibility – A company is also known for extending their support to society in whatever fashion they can. Recently with new guidelines, public limited companies are required to spend x% of their revenues on corporate social initiatives. It is challenging for startups to budget for these activities. Nevertheless, it helps to create decent provisions to include some of these activities including charitable causes to be part of MoA. Including these, do not require you to spend on the same, but rather gives flexibility to spend on these activities whenever you feel you have room for the same. It also helps project your social responsibility face and intent of the company and in a subtle way help create a long term branding.
- Related activities – It is important to comprehend a wide set of related extensions and activities in various areas you are currently operating. It may also be a good idea to have some diversification here to have a better flexibility and control to make changes to your existing business or adapt newer activities as you go along. This becomes more important if the initial set of activities planned donot work out the way you had anticipated. Donot try to have everything under the sun, as the registering authorities and other stake holders donot view this favourably but at the same time donot restrict or narrow down activities drastically. An experienced CA/ expert can help you achieve a right set of activities in close consultation with you.
- Format of document – MoA need to follow specific formats and guidelines to satisfy various legal and compliance needs. It is always advisable to take help of an expert in drafting this.
- Making Changes to MoA – When the business needs to change drastically, even a well comprehended MoA may fall short to meet the new requirements. It is possible to make changes to MoA by following specified processes. You can also look at changing the name of the company to reflect your changing needs.
MoA is an important document and should be drafted carefully. This requires understanding your business model clearly and also possible set of supporting and related activities that will strengthen achieving your business goals. Talk to an expert and work closely with them, help them understand your requirements and draft a suitable MoA during your company incorporation.[About the author: eLagaan offers end to end CA, CS, Business Legal & Payroll services for businesses. It specialises in formulating investor friendly structures & terms, staying compliant, setting up best practices desired by founders, investors & employees. This facilitates businesses to grow & scale with ease and stay fundable, saleable and compliant.]