There are many reasons to identify and articulate a clear business purpose, including to:

• set a direction of travel and clear expectations for all parties
• enable alignment of interests between directors, shareholders, employees and others
• enable deeper connection and collaboration on the part of key stakeholders
• support the business to live out its values and encourage the right behaviours

Careful thought needs to be given to how purpose is communicated and articulated, if the purpose is to be effective legally and to communicate the right message to the relevant stakeholders. Many business leaders think that a purpose which positively describes the good  the company does for society puts it at a competitive advantage in the market for talent, investment and customers.

Yes. All companies have a purpose. Under company law, the default purpose of a limited company is to benefit the shareholders of the company, while having regard to wider stakeholder considerations. Increasingly, many companies feel that this description of the purpose of a company places too narrow an emphasis on profit and fails to fully capture their true purpose. These companies are being set up and run with the aim of doing more than simply generating a profit for shareholders. Fortunately, company law allows a company to specify purposes other than benefit to shareholders.

Some companies have a specific purpose that relates to their commercial goals. For example, a company might aim to be the most innovative company in its sector, or the best place to work. This purpose might be so fundamental to the company that it makes sense for it to be identified formally, alongside shareholder benefit.

Beyond this, some companies want to have a positive impact on the society and the environment, while also generating profits for shareholders. They might focus on a specific social or environmental impact, for example promoting healthy eating. Or they might aim to benefit society more generally. In either case, this social impact would be core to the purpose of the company.

Some companies go even further and decide to put people or planet before profit to shareholders. For some, this means prioritising a specific social or environmental purpose. For example, a company’s primary purpose might be to create employment opportunities for people with disabilities, or to promote clean energy solutions. This doesn’t mean that they can’t distribute profits to shareholders at all, but they do so only in order to achieve their stated purpose, which must come first in any decision-making.

There are three key things to consider when defining purpose:

1. Does the company have a purpose other than generating profit for shareholders?
2. Is this purpose specific or more general?
3. How important is this purpose in comparison with generating profits for shareholders?

Company articles are the legal terms which govern the way a company is run. They set out what the shareholders expect of the company and of the directors. If a business has a stated purpose but this is not reflected in the articles of the company, there is a risk that the directors will feel that they do not have real authority to advance the stated purpose. Instead, the directors may feel that their real obligation is to advance the shareholders’ interests first and foremost. By reflecting the purpose of the company in the articles, there is an opportunity to make it very clear that the company has an agreed purpose which shapes the expectations placed upon the directors. It effectively redefines success for the company, and means that directors must take decisions in line with the purpose.

The Purposely model articles place the agreed purpose in what is known as the objects clause in the articles. The agreed purpose of the company shapes the duties and responsibilities of the directors, along with any responsible business principles which the company agrees to uphold. These principles are a way of setting out what standard of behaviour is expected of the company and those working for it.

The directors are obliged to report on the impact the company has had in pursuit of its purpose. In some of the Purposely model articles, the purpose of the company leads, in turn, to changes in the relative prioritisation of the interests of shareholders and other stakeholders. And others include restrictions on how the directors of the company may decide to distribute profits or what to do with assets if the company is would up. In summary, the articles support the directors and others to get behind an agreed purpose.

Purposely has adapted the standard articles that are used by the vast majority of UK companies – the standard company limited by shares – and created amended versions to suit the needs of a range of purposeful businesses. You can view this default set of articles here, on Companies House website.

There are other forms of company that founders may wish to consider when they are incorporating their business, such as the community interest company or the company limited by guarantee. Purposely does not try to help founders to decide which company form is right for them.

For information on these other options, see https://www.gov.uk/set-up-business, https://www.gov.uk/set-up-a-social-enterprise.
 

For a detailed guide on the Purposely articles and how they differ from the default model articles for UK companies limited by shares, please read this guide.

If you are serious about your company’s purpose, you likely want to ensure that the investors you are working with share your commitment to the company’s purpose. Incorporating your purpose will help you achieve this as it will make it clear to investors what they are buying into and that the purpose will not change as the business grows and evolves.

Embedding purpose in the articles redefines what success means for the business and therefore reshapes directors’ duties, so that directors are obliged to make decisions in line with the purpose. As with any company, the company may have a claim against directors who breach their duties. However, while embedding purpose redefines and reshapes the existing duties of directors to promote the success of the company, it does not create any new rights for the company or for third parties and so does not create new forms of liability for directors.

For the avoidance of any doubt, the Purposely model articles include language to make it clear that stakeholders are not granted rights of recourse against directors in respect of the carrying out of their responsibilities.

In some of the Purposely model articles, the purpose of the company applies restrictions on how the directors of the company decide to apply profits or surpluses after winding-up.

This does not affect the fundamental principle (codified in s170 of the Companies Act 2006) that the duties of directors are owed to the company (and generally not to anyone else) and so the only person with a right of recourse is the company itself or, in limited circumstances, a member on behalf of the company.

Company articles can be changed. By default, amending company articles can only be done with the agreement of 75% of all shareholders. It is also possible to raise this bar (a so-called ‘super-majority’) if so desired, or use other legal mechanisms to make it harder to change specific clauses such as the objects clause. In practice, changing the purpose should be done with the involvement of all company stakeholders, which means it is a serious step. You would also need to consider the reputational implications of changing the company’s purpose.

To find out more on how this can be done visit https://www.gov.uk/make-changes-to-your-limited-company.

Only Model 4 limits the returns to shareholders so you can choose any of the other models depending on your other purpose preferences. Find out which model suits you by using the tool.

B Corps are businesses that have gone through a certification process with rigorous standards for social and environmental performance, accountability, and transparency. Companies limited by shares can become B Corps if they undertake the certification process, which includes amending the company articles to commit to having an overall positive impact on the society and environment. If you are planning to seek B Corp certification, you should choose Purposely models 2, 3 or 4. These models are designed to satisfy the UK B Corp legal requirement, which means that you would be eligible as long as you achieve a high enough score in the B Impact Assessment.

For more information about B Corp certification, please contact B Lab UK. 

Unlike traditional, commercial investment, social investment has an expectation of a social as well as a financial return. UnLtd’s experience suggests that organisations are able to raise investment regardless of the legal structure they choose. 

Some companies limited by shares can struggle to attract social investment due to a perception that social impact may not be at the core of the business. Committing your organisation to a purpose may help convince investors, but such decisions are often made on a case-by-case basis so it is hard to generalise.

By definition, social enterprises should:

• Have a clear social and/or environmental mission set out in their governing documents
• Reinvest the majority of their profits
• Generate the majority of their income through trade
• Be majority controlled in the interests of the social mission
• Be autonomous of the state
• Be accountable and transparent

In Purposely, the model 4 articles meet these criteria. Model 3 is similar to a social enterprise in that it has a primary social purpose, but it lacks a legal commitment to reinvest the majority of the profits. Social enterprises can also opt for other legal structures such as the Community Interest Company (CIC). You can find out more on the webpages for the CIC Regulator.

The Purposely model articles have been drafted by law firm Bates Wells. You are free to change the wording of the models, but any changes may have legal implications, so we suggest you consider whether you need to seek legal advice. Please see the section entitled ‘Should I still get legal advice?’ in these FAQs.

First we recommend you read through the FAQs as they give some background on purpose and the different factors you might consider when choosing the right articles. If you are still unsure then have a look at the following resources

• https://www.gov.uk/set-up-business
• https://www.gov.uk/set-up-a-social-enterprise
• Legal forms for business: a guide - GOV.UK (www.gov.uk)
• http://www.trust.org/publications/i/?id=fb362caf-6795-4f23-aa20-212b9654e877
• http://bcorporation.uk/

Purposely, the model articles and the tools available on the Purposely website do not constitute legal advice and should not be relied upon as such.

The model articles and other tools available on the Purposely website may not be suitable for every situation. They are intended to be used as templates and should be adapted by you as necessary to meet your individual requirements. If you need legal advice for your specific situation, please consult a lawyer. This is particularly important if you plan to change the wording of the model articles or any other materials provided on the Purposely website, or if you have any questions about their legal implications. You can speak to your usual legal advisor, or get in touch with Bates Wells on hello@bateswells.co.uk.

Please note that Bates Wells will not be reviewing your use of any of the model articles or other materials available from the Purposely website as part of the Purposely process. Your use of the tools on the website, including the model articles, does not create a lawyer-client relationship between you and Bates Wells. 

Please read our ‘Important Notes’ section for more detail. 

We recommend you use the tool first, but if you would like to see the detail of all the model articles, you can download them directly here:

• Model 1 articles
• Model 2 articles
• Model 3 articles
• Model 4 articles

The Purposely model articles include a set of principles for you to consider that have been developed by A Blueprint for Better Business. You are free to tailor these, or use a different set of principles altogether. There are a number of different approaches to developing responsible business principles, including the following.

The Institute of Business Ethics The Institute of Business Ethics has developed a very simple Nine Step Model for developing and implementing a code of ethics or responsible business principles, which emphasises the importance of the process of developing the principles, as well as the content of the principles. The Institute has also developed a more detailed handbook, called Codes of Business Ethics: A Guide.

A Blueprint for Better Business A Blueprint for Better Business has set out five simple Principles for a purpose driven business. These principles are for companies which seek to operate true to a purpose that serves society, respects the dignity of people and, as a result, generates a fair return for responsible investors. The principles are supported by an accompanying Framework.

Business in the Community Business in the Community published the Responsible Business Map, which builds upon the UN’s Sustainable Development Goals and sets out key behaviours for a healthy business, which is described as a business that puts creating healthy communities and a healthy environment at the centre of its strategy to achieve long-term value.

Big Society Capital Big Society Capital expects businesses which it invests into to adopt certain Responsible Business Principles and to require their investees in turn to adhere to the same principles. The principles are designed to be easy to observe and cover basic expectations about responsible business conduct with respect to employees, customers and the environment. The principles also set out certain proscribed forms of activity which investees of Big Society Capital should not be carrying out.

United Nations The UN has developed The Ten Principles of the UN Global Compact, which are derived from principles set out in the UN Declaration on Human Rights and other major international treaties. The principles are set out at a high level accompanied by more detailed explanations. The UN has also developed the UN Guiding Principles on Business and Human Rights, which are specifically designed to aid multinational companies to support international human rights norms.

Other Examples There are many other examples of statements of responsible principles which have been developed by individual companies to suit their specific circumstances and needs, such as those of Unilever or Telefonica to give just two examples of those produced by large companies.

As with any company, the company may have a claim against directors who breach their duties. However, while embedding purpose redefines and reshapes the existing duties of directors to promote the success of the company, it does not create any new rights for the company or for third parties and so does not create new forms of liability for directors. In particular, the Purposely model articles do not affect the fundamental principle (codified in s170 of the Companies Act 2006) that the duties of directors are owed to the company (and generally not to anyone else) and so the only person with a right of recourse is the company itself or, in limited circumstances, a member on behalf of the company.

For the avoidance of any doubt, the Purposely model articles include language to make it clear that stakeholders are not granted rights of recourse against directors in respect of the carrying out of their responsibilities.

In any event, the shareholders may decide to amend the articles of association to remove the Purposely model articles’ special features by passing a shareholders resolution (provided that there are no additional provisions to entrench these special features).