Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements

IStock_000021228331XSmallIt is generally required that a nonprofit’s Articles of Incorporation or other organizing document state the general purpose(s) of the corporation. For example, the Articles of a California nonprofit public benefit corporation must include the following statements verbatim: “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 [public purposes, charitable purposes, or public and charitable purposes].”

A nonprofit’s Articles or organizing document might also include a specific purpose statement. In some situations, a specific purpose statement may be required. For example, a California nonprofit public benefit corporation that is organized for public purposes or intends to apply for state franchise tax exemption is required to provide a statement describing the specific purposes of the corporation. In other cases, some nonprofits may elect to include a specific purpose statement for various reasons, some of which are discussed below.

Although referred to as a “specific purpose statement,” a nonprofit generally has quite a bit of latitude in how broad it may draft the specific purpose statement. For example, it is not uncommon to find the following specific purpose statement in the Articles of a California public charity: “Such purposes for which this corporation is formed are exclusively charitable and educational within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1986.” Such a broad specific purpose statement has certain advantages such as allowing for the organization’s mission to evolve without requiring an amendment to the Articles. It can also help in avoiding some of the issues that can arise from a very specific or poorly drafted purpose statement such as:

  • Charitable Trust Doctrine. If the specific purposes are limited, for example, to a narrow range of activities or locations, the use of charitable funds it receives will generally also be limited to those activities or locations, even if circumstances change in the future. This is what is commonly referred to as the charitable trust doctrine under state law. For example, if the specific purposes of a public charity is described in its Articles as “providing after-school math and science tutoring to middle school students in San Francisco,” then funds donated to the corporation generally cannot be used towards tutoring such children in other subject matters or tutoring the same subject matter but to middle school students in another city. This can present serious problems for organizations with missions that evolve, for example, to meet greater demands or to respond to current conditions (e.g., a growing need for after school tutoring in neighboring cities) but which have failed to update their governing documents accordingly. Even if the organization updates its specific purpose statement to “after-school tutoring in all subject matters for middle school students in Northern California,” the contributions received during the time the specific purpose statement only addressed math and science tutoring in San Francisco will be restricted pursuant to those limitations.
  • Unrelated Business Income. A specific purpose statement may also trigger certain tax consequences of conducting unrelated business activity. In the example above, if the after-school tutoring organization also decides to support the middle school’s athletic programs by
    raising money through a booster club (e.g., selling candy), such activities would be unrelated to the specific purposes stated in its Articles. Consequently, the organization may run the risk of being taxed on this unrelated business income.

Thus, by stating the purposes broadly—e.g., “to engage in charitable and educational activities within the meaning of Section 501(c)(3) of the Internal Revenue Code”—an organization may be able to avoid inconvenient limitations on the use of funds and/or impositions of unrelated business income tax.

On the other hand, a broad specific purpose statement can also bring undesired consequences such as allowing room for mission drift or perpetuating a lack of organizational clarity about the mission and vision of the organization. Accordingly, a more detailed specific purpose statement may have certain advantages such as helping to steer the organization’s evolution in a direction consistent with the original purposes for which the organization was founded or making it more difficult for future leaders of the organization to change the intended mission of the organization (because an amendment to the Articles must typically be filed with the State) which may be important for founders.

Ultimately, the take away for organizations is to carefully consider the reasons for, and drafting of, their specific purpose statements. Specific purpose statements can have direct and often unintended consequences on the activities and liabilities of an organization, only some of which has been discussed above. Additionally, language which might otherwise be appropriate for slogans, phrases, or other marketing purposes simply may not be appropriate for a legal document such as an organization’s Articles. When in doubt, it is always recommended to do your research and seek help where needed.

Co-authored with Michele Berger.