When starting a limited liability company or corporation, businesses in most states must provide a written statement of business purpose in their formation documents (articles of incorporation or articles of organization). The business purpose statement describes why, and for what legal purpose, will the LLC or corporation exist. This is not the same as a company’s mission or vision statement, which businesses often leverage when seeking financing, attracting customers, and rallying employee morale.
In most states’ articles of incorporation and articles of organization, the purpose statement is a brief explanation of what business activities the company is requesting legal approval to conduct in the state.
Note some states ask for a “statement of lawful purpose” and a “statement of specific purpose.” The first being rather general and the second providing a more detailed description about the business activities the company will participate in.
A handful of states ask for NAICS (North American Industry Classification System) codes instead of a written statement to identify a business’s industry and activities. Those states include:
- New Hampshire
- New Mexico
In this article, I’ll share some information about purpose statements to help business owners better understand what might be expected as they prepare their formation documents. To ensure that a business statement of purpose provides enough information to satisfy states’ requirements while giving a company enough room for growth in the types of activities it conducts, entrepreneurs can benefit from consulting their attorneys for guidance.
Most states provide their formation document templates online. The statement of purpose field in some forms doesn’t provide much room, so sometimes business owners need to attach a separate page to expand on the purpose, which they may then attach to the filing.
Corporation’s Articles of Incorporation Purpose Statement
States typically do not require C corporations to be very specific in their purpose statements within the articles of incorporation. To avoid creating a too-limited scope of business activities, companies often create a broad statement of business purpose. Business owners should consult their attorneys about what is best.
An example of a non-specific statement is:
“The purpose of the corporation is to engage in any lawful activity for which corporations may be incorporated in this state.”
In some state’s articles of incorporation, that (or a similar) statement is present as a placeholder that the preparer may use or modify.
When states require a more detailed explanation of a corporation’s purpose, companies sometimes use the state’s default verbiage and add something specific about the type of business it conducts.
LLC’s Articles of Organization Purpose Statement
Many states require a limited liability company (LLC) to provide a general statement of purpose in their formation documents (called articles of organization, or in some states referred to as a certificate of organization or certificate of formation). Several states ask for a more specific purpose statement.
Here’s an example of what a general LLC purpose statement might look like:
“The purpose of this limited liability company is to engage in any lawful activity for which limited liability companies may be organized in this state.”
In states that require a more detailed statement, business owners must provide a more descriptive account of the type of activities the company will participate in. For example, a website development company might include, “provide website design and related services,” or an automobile mechanic shop might say, “provide vehicle repair, maintenance, and related services.” Again, the exact wording an entity uses will depend on where the business is located and the unique nuances of the company.
Because articles of organization identify why an LLC legally exists, it’s helpful for business owners to discuss the wording of their statement of purpose with their attorneys.
Purpose Statement on Nonprofit Articles of Incorporation
Nonprofit organizations must consider how their statement of purpose will affect their authorization to do business in their state and their tax-exempt status with the IRS.
Different types of 501c categories exist for nonprofit organizations that wish to be exempt from federal income tax. Most nonprofits seek 501(c)3 status, which provides federal income tax exemption and eligibility to receive tax-deductible charitable contributions. A nonprofit’s statement of purpose in its state’s articles of incorporation is one of the factors the IRS will consider when deciding if it will classify an organization as a 501(c)3.
The Importance of Operating Within a Business’s Stated Purpose
No business owners relish the thoughts of lawsuits against their companies. However, the possibility of legal action is a risk for organizations in all industries. When the unthinkable does happen, courts will consider a variety of factors in determining liability. Among them is whether the company has been adhering to all of its compliance responsibilities, including operating within its statement of purpose. If a business is found conducting activities that do not align with what the entity describes in its formation documentation and operational documents (i.e., corporate bylaws or LLC operating agreement), the court might rule against the business entity and its owners. Also, it may put the business in jeopardy of fines, penalties, or even dissolution.