Articles of association

What it means

The articles of association are the founding document of an s. r. o. with several members. They set contributions, share sizes, the company’s bodies, signing rules and how decisions are taken.

With a single member a deed of foundation takes their place with the same content. Both are filed in the collection of deeds and are publicly available.

Not everything the partners agree on belongs in the memorandum of association. The memorandum is public in the collection of deeds, so sensitive arrangements, such as financing, remuneration or an investor’s exit, go into a separate shareholders’ agreement. That agreement is not public and binds only those who signed it, not the company itself.

How it works in practice

It is worth putting more than the statutory minimum in: terms for transferring an interest, pre-emption rights, deadlock resolution, and what spending needs general meeting approval.

Changing them requires a general meeting resolution, often as a notarial deed, and a register entry. So they are set at incorporation rather than later during a conflict.

By law, the share of profit follows the ratio of paid-up contributions unless the memorandum provides otherwise. If the partners want to split profit differently, for instance by the work each puts in, the memorandum must expressly allow it. Before every profit distribution we therefore open the client’s memorandum, so the proposal for the general meeting matches what it says.

What to watch out for

A template from the internet covers forming the company, not parting ways. That is where partnerships break: with no rules on transferring a share or breaking a deadlock, only a court is left.

If the memorandum says nothing about a partner’s death, the stake passes to the heirs, and the company may end up with partners nobody planned for and who have no interest in the business. Inheritance of the stake can be excluded, or replaced by the other partners’ right to a transfer of the stake at an agreed price, but only while everyone is still at the table.