Starting a company in Pakistan? The Memorandum of Association (MoA) is your first and most crucial step. Think of it as the foundation upon which your entire business structure is built.
In this blog post, we’ll break down the five essential clauses of the MoA, explaining their significance and how they shape your company’s legal identity and operations. We’ll also explore the differences between the MoA and the Articles of Association, and why it’s so vital to get these documents right from the start.
Whether you’re a budding entrepreneur or an established business owner, understanding the MoA is key to ensuring your company’s smooth functioning and compliance with Pakistani law.
Let’s dive in and explore the intricacies of this pivotal document.
What is a Memorandum of Association under the Companies Act 2017?
To legally establish a company, you need a registered document called the Memorandum of Association (MoA). Think of it as your company’s constitution, outlining its purpose and rules. Without it, your company won’t be officially recognized. It’s one of the two essential documents you must submit for company registration in Pakistan.
Key Sections in Your Memorandum of Association (MoA)
Here are the main points your MoA must cover:
- Name Clause: Clearly state your company’s full name and its legal structure (SMC, Private Limited, or Public Limited).
- Registered Office Clause: Specify the location of your company’s registered office (province, capital territory, or other area).
- Object Clause: Detail the type of business activities your company will undertake.
- Liability Clause: Define the financial responsibility of your company’s members if it were to close down.
- Capital Clause: Declare the total authorized capital of your company and the value of each share.
Memorandum of Association (MoA): Your Company’s Rulebook
Think of the Memorandum of Association (MoA) as the constitution or the rulebook for your company. It’s a crucial legal document that everyone involved in forming the company must sign. The MoA defines the company’s scope, structure, and limitations, acting as a guide for its operations. It outlines what the company can and cannot do.
Once registered, the MoA becomes legally binding, governing the company’s actions and its relationship with shareholders. It covers important aspects like the company’s objectives, its legal structure, the powers it has, the limits it must adhere to, its financial setup (capital structure), and the responsibilities of its members.
Since the MoA sets the boundaries for your company’s activities, it’s essential to ensure that all your business endeavors fall within its scope. Any unauthorized actions could be considered illegal and lead to penalties for the company, its shareholders, and management.
Memorandum of Association (MoA): A Legal Definition
In Pakistan, the Companies Act 2017 is the law that governs how companies are formed and operate. This Act defines the “memorandum” as:
the memorandum of association of a company as originally framed or as altered from time to time in pursuance of company law or of this Act
While this definition may seem a bit technical, it essentially refers to the original document that establishes a company, along with any changes made to it over time according to the law. Other sections of the Companies Act provide more details on the contents and importance of the MoA.
Why Your Memorandum of Association (MoA) Matters
Since a company is considered a separate legal entity under Pakistani law, its Memorandum of Association (MoA) is of paramount importance. Think of it as the company’s guiding document, shaping its overall behavior and setting the boundaries for its activities. It also empowers the company, its management, and shareholders to conduct business within a defined scope.
For instance, if you envision your company growing into a large organization with public investments, your MoA must include provisions that allow for this. Similarly, if your company has a specific purpose or time frame, the MoA needs to reflect that. Additionally, the MoA determines the size of your company and how shares are distributed among the shareholders.
In short, the MoA is a critical document that lays the foundation for your company’s operations and future growth.
Memorandum of Association (MoA) and SECP
When you’re ready to set up a company in Pakistan, you need to file your Memorandum of Association (MoA) with the Securities & Exchange Commission of Pakistan (SECP), specifically with their company registrar.
This is part of the company registration process, where you’ll submit the MoA along with other required documents to the SECP. The SECP has specific rules and formats for the MoA, which we’ll discuss further below.
It’s important to remember that your MoA, once filed with the SECP, becomes a public document. Anyone can access it to understand your company’s structure, details, and the kind of business it does.
Memorandum of Association vs. Articles of Association: What’s the Difference?
We’ve talked about how the Memorandum of Association (MoA) is like the constitution of your company, covering its basic identity, purpose, and structure. On the other hand, the Articles of Association (AoA) are more like the company’s internal rulebook.
The AoA goes into detail about the day-to-day operations of the company, including the rights and duties of shareholders, directors, and management. It’s the go-to document for any internal matters, ensuring that everything is done by the book.
While both the MoA and AoA are crucial, remember that the MoA takes precedence if there’s ever a conflict between the two. And of course, both documents must always comply with the law.
What Must Be Included in Your Memorandum of Association
The Companies Act 2017 outlines specific clauses that every Memorandum of Association (MoA) should have. While most of these clauses are the same for all types of companies, there might be some variations depending on the specific nature of your business. Generally, every MoA needs to include clauses about the company’s name, registered office address, objectives, capital, and liability.
Finally, the MoA needs to be signed by all the people involved in forming the company. This shows their intention to create the company and their commitment to buying the shares mentioned in the MoA.
The Name Clause in Your Memorandum of Association
The Name Clause is the very first part of your Memorandum of Association (MoA). It states the official name your company will use once it’s registered. This name will be on all your company’s documents and at all its business locations, serving as its legal identity. You can change your company’s name later, but you’ll have to follow the proper legal procedures.
Important: Depending on your company type, you need to include specific words at the end of your company name:
- Private Limited Company: “(Private) Limited”
- Single Member Company: “(SMC-Private)”
- Public Limited Company: “Limited”
- Unlimited Liability Company: “Unlimited”
- Company Limited by Guarantee: “(Guarantee) Limited”
If you miss these words, you could face legal trouble for providing incorrect information.
Registered Office Clause in the MoA
The second important part of your MoA is the Registered Office Clause. This is where you specify the official location of your company’s registered office. While you can mention a specific city, it’s often better to just mention the province. This way, if you need to move your office to a different city within the same province, you won’t have to go through the hassle of changing your MoA.
However, if you plan to move your registered office to a different province or the capital territory, you’ll need to amend this clause after fulfilling the necessary legal requirements.
The Object Clause: Defining Your Company’s Purpose
The Object Clause is arguably the most crucial part of your Memorandum of Association (MoA). It lays out what your company plans to do – the business activities it will undertake. Importantly, it also specifies what your company is not allowed to do.
Generally, companies in Pakistan can engage in any lawful business. However, the Companies Act 2017 requires you to clearly state your “principal line of business” right at the start of the Object Clause. This is the main activity where your company will have most of its assets or generate most of its income. It should align with your company’s name, but you can change it later if needed, following the proper process.
The Object Clause also needs to list certain businesses that your company is prohibited from engaging in unless it has a specific license. These include:
- Banking
- Non-banking finance
- Microfinancing and Microcredit
- Real Estate Investment Trust
- Insurance
- Modaraba Management
- Stock Brokerage
- Forex
- Security Services
- Any other business prohibited by law
Furthermore, your Object Clause must explicitly state that the company will not engage in:
- Multi-level marketing
- Pyramid and Ponzi schemes
- Lottery business
- Any other unlawful business
So, by clearly defining your company’s objectives and restrictions, the Object Clause helps ensure that your business operates within legal boundaries and avoids any potential penalties.
The Liability Clause: Defining Member Responsibility
The fourth clause in your Memorandum of Association (MoA) is the Liability Clause. This clause outlines the financial responsibility of your company’s members (shareholders) in case the company is wound up or closed down.
Limited Liability Company
In this common setup, the clause states that members’ liability is limited. This means their personal assets are generally protected, and they’re only responsible for the unpaid amount on their shares, if any.
Unlimited Liability Company
In this less common type, the clause clearly states that members have unlimited liability. This means their personal assets could be used to settle the company’s debts if it’s wound up.
Guarantee Limited Company
Here, the clause mentions that members’ liability is limited to the amount they’ve agreed to contribute if the company closes down. This amount is specified in their undertaking.
The Capital Clause: Outlining Your Company’s Share Structure
The final and fifth clause in your Memorandum of Association (MoA) deals with your company’s capital structure. If your company is limited by shares or is a guarantee limited company with share capital, this clause will specify the authorized capital and how it’s divided into shares of a fixed value.
The authorized capital is the maximum amount of money your company can raise by issuing shares. You can divide this capital into shares of any value you choose, such as Rs. 10, Rs. 20, Rs. 100, or Rs. 1,000.
At the end of the MoA, the people setting up the company (the subscribers) sign their names to show their agreement to form the company and to take the number of shares listed next to their names.
Wrapping Up
The Memorandum of Association (MoA) is the cornerstone of your company. It’s a vital document that you need to file with the registrar of companies, along with other paperwork, to officially establish your business. The MoA includes crucial details about your company’s name, registered address, business goals, liability structure, and share capital.
Crafting your MoA carefully is essential because it outlines the scope of your business activities, the size of your company, and its legal structure.
Need help with company registration or understanding the nuances of the MoA? HETCO is here to assist! Contact us today for expert guidance.