There are multiple types of company rules (Articles of Association) or agreements which each define different structures for running businesses. By choosing the agreement type that best suits your business and your wishes for how it is run in different circumstances, optimal business functions can be achieved.

Keith Hardington, Walker Foster’s Director and Head of Corporate Commercial Law, explains the differences between the various types of commercial agreements and how business owners can best choose one for their business.

What is an Article of Association?

Articles of Association serve as the constitutional framework of a company, outlining the rules that govern its internal management and operations. These legally binding documents set out the key principles for how decisions are made, the roles and responsibilities of directors and shareholders, and the processes for handling disputes or changes within the business. Essentially, the Articles define how a company functions on a day-to-day basis and provide clarity to all stakeholders, helping to prevent misunderstandings and conflicts.

Every registered company in the UK is required to have Articles of Association, and these must comply with the Companies Act 2006. While some businesses choose to adopt the standard model articles provided by the government, others opt for bespoke Articles tailored to their specific needs. Customised Articles can help ensure the company operates in a way that aligns with the founders’ vision, setting out provisions for governance, voting rights, dividend distribution and shareholder protections.

Legal obligations to Articles of Association

Both the company and its stakeholders - directors, shareholders and company secretaries - are legally bound by the Articles of Association. These obligations include:

• Directors’ duties: directors must act in accordance with the Articles, ensuring they manage the company in line with its stated rules. This includes decision-making processes, appointment and removal procedures and limitations on their authority.
• Shareholders’ rights and responsibilities: shareholders must adhere to the Articles when it comes to matters such as voting rights, issuing new shares and selling or transferring shares. The Articles may also specify protections for minority shareholders.
• Company compliance: the company as a legal entity must follow the Articles in all business operations. If the Articles are breached, it can lead to legal disputes, governance issues and potential regulatory penalties.

Understanding agreement types

Choosing the right legal framework for a business is an important decision that can shape its long-term stability and success. Different agreements provide structure, governance and protection for business owners, partners and stakeholders. These agreements help set expectations, outline responsibilities and establish clear procedures for handling disputes or changes within the business. Having a well-structured agreement can promote transparency and help prevent conflicts by clarifying how the business will be managed and how decisions will be made.

Shareholder Agreements

A Shareholder Agreement is designed for companies with multiple shareholders, setting out the rights, obligations and protections of each party. While Articles of Association provide a general framework for company governance, a Shareholder Agreement goes further by covering matters such as share transfers, dividend policies and decision-making processes. It can also include provisions for dispute resolution and safeguard minority shareholders’ interests. 

Partnership Agreements

For businesses operating as traditional partnerships, a Partnership Agreement is highly beneficial. Without one, a partnership will automatically be governed by the Partnership Act 1890, which may not reflect the intentions of the partners. A tailored agreement allows partners to define profit-sharing arrangements, decision-making powers, responsibilities and exit strategies. It also provides clarity on how disputes will be handled, reducing uncertainty and potential disagreements. 

LLP Agreements

A Limited Liability Partnership (LLP) Agreement is designed for LLPs, which offer the benefits of a partnership while limiting personal liability for members. This agreement outlines how the LLP will be managed, including voting rights, capital contributions, profit distribution and the process for admitting or removing members. It also helps define responsibilities and expectations, giving members a structured approach to decision-making and business operations. 

Farming Partnership Agreements

Agricultural businesses often operate under unique circumstances that require specialised agreements. A Farming Partnership Agreement is tailored to the needs of farming businesses, addressing matters such as land ownership, profit distribution, succession planning and operational responsibilities. Farming partnerships are often family-run, making clear agreements even more important to avoid disputes and plan for future generations. By setting out roles, investment contributions and exit strategies, farming families and business partners can protect their interests and plan for long-term success.

Other agreements

Beyond these common structures, businesses may require additional agreements tailored to their industry or specific circumstances. These could include Joint Venture Agreements, Franchise Agreements or Supplier Agreements, each designed to provide clarity on rights, obligations and commercial arrangements.