A charity’s articles of incorporation must limit the corporation’s purposes to one or more of the exempt purposes set forth in Section 501(c)(3) of the Internal Revenue Code:
“religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.”
If the articles include a purpose statement that does not explicitly fall within one or more of the exempt purposes, the corporation may fail the 501(c)(3) Organizational Test, which may result in a denial of 501(c)(3) tax-exempt status. For example, if the articles simply state that the purpose of the corporation is “to operate a school,” exemption could be denied because operating a school does not necessarily further a 501(c)(3) exempt purpose. Instead, the articles might state that the purpose is “to operate a school for educational purposes.” It may also be prudent to add the following phrase or a more specific variation of it that is consistent with the purpose statement:
“Notwithstanding anything herein to the contrary, the purposes of this corporation are limited to exclusively to exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.”
In California, a nonprofit public benefit corporation (the appropriate type of corporation for a charity) must state that it is organized under the Nonprofit Public Benefit Corporation Law for public, charitable, or public and charitable purposes. If the articles reference public purposes or if the corporation files for state tax exemption, a further description of the corporation’s specific purposes is required. Otherwise, a description of the corporation’s purpose (e.g., a specific purpose statement) is optional.
The term “charitable” is used in Section 501(c)(3) in its generally accepted legal sense and includes:
- Relief of the poor and distressed or of the underprivileged;
- Advancement of religion;
- Advancement of education or science;
- Erection or maintenance of public buildings, monuments, or works;
- Lessening of the burdens of Government; and
- Promotion of social welfare by organizations designed to accomplish any of the above purposes, or –
- to lessen neighborhood tensions,
- to eliminate prejudice and discrimination,
- to defend human and civil rights secured by law, or
- to combat community deterioration and juvenile delinquency.
Many attorneys recommend a very broad purpose statement in the articles of incorporation. The rationale:
- To avoid imposing an overly restrictive constraint on the charity’s mission (which may evolve over time) and activities.
- To avoid imposing an overly restrictive charitable trust on the charity’s assets (which may be restricted to uses only in furtherance of the charity’s purposes at the time they were received).
- To avoid the need to amend the articles and file amended articles with the Secretary of State each time the purpose statement changes.
Here is an example of an article containing the purpose statement for a California nonprofit public benefit corporation:
This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law for charitable purposes. The specific purposes for which this corporation is formed are exclusively charitable within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986.
A more specific purpose statement (perhaps incorporating the charity’s mission statement) may be included in the charity’s bylaws. However, to the extent that a charity wants to really lock in its purpose to prevent future boards from easily diverging from its original intended course, a specific purpose statement may be added to the articles of incorporation following the more broader statement exemplified above (e.g., “The specific purpose of this corporation is to provide preschool education to children in the Richmond district.”). This may be precisely what is desired and appropriate.
On the other hand, consider the following scenarios in the case of the charity with the specific purpose statement limiting itself to furthering preschool education to children in the Richmond district:
- The charity gets an offer (and a large grant) to take over the preschool of a neighboring district.
- The area gets rezoned and the preschool is now located outside of the Richmond district.
- The charity has the opportunity to collaborate with preschools in other districts.
While it is not too difficult to amend or restate articles of incorporation, it’s not something that a charity wants to do with regularity. Also, all too frequently, charities begin pursuing other purposes outside of the scope of the purposes in their articles and fail to amend the articles. This may risk the charity and its board to charges of misrepresentation and acting beyond their powers (ultra vires).
Accordingly, charities should choose their purpose statement carefully. Further, boards should remember that the purpose statement in the articles does not need to be the charity’s current mission statement or the result of careful wordsmithing for marketing purposes. Very few, if any, donors will make the decision to donate based on the purpose statement in the articles, particularly if it contains the broad language described above.