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.

7 thoughts on “Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements

  1. Erin Pagaduan

    Hello,
    I am in the very beginning stages of putting together my 501 (c).
    I am weary in making sure that I include all the right wordage in my mission statement for obtaining my Articles of Incorporation.
    The charity is called, Foster the Earth. We will be taking foster children backpacking in the back country.
    So my mission statement would look and read if I am correct:
    Belief that taking Foster children and at risk youth into the wildnernes for multiple days will nurture their souls and teach them the tools of taking care of themselves and achieving goals of personal success thru immersion of the great out doors.
    I really would Love your feedback if you believe my wordage is including enough without being to broad.
    Thank you very much for your time and support.

  2. Kenny

    We have golf club formed. Now we want to get the monthly club dues collected under the club name. We are looking to profit. We no we need to go non-profit. I just need some good advice to help me along. I know about the 501(c)(3). I just want to make sure I fill out correctly. What type of cost will the club incur once all the paperwork is processed? Thx
    Kenny

    • Gene Takagi

      Golf clubs supported by member dues usually don’t provide the type of charitable public benefit that would qualify under 501(c)(3). They are more often organized as nonprofit social clubs exempt under 501(c)(7). I’d recommend that you talk with a lawyer who knows these areas of the law before you move forward.

  3. Hello,
    I am helping to put the paperwork together for a new school. This is the purpose statement I have come up with using the Mission Statement from the people who are starting the school.

    The purpose of Revolution Herald is to operate a school for education. Inspiring students by teaching skill-based training to help them achieve future education and career goals.

    This is the Mission Statement: Renew belief in the value of education and skills-based training by engaging failing and at-risk youth with relevant history, philosophy and real world experiences that inspire students to achieve future education and career goals.

    I used your advice and left out the failing and at-risk youth because eventually we would like to educate adults that did not finish High School but would like a H.S. Diploma –

    What are your thoughts on the Purpose Statement?

    Thank You for any thoughts you may have – and thank you for your blog – it has been very helpful for me – this is a large undertaking – and very challenging – and I am loving the opportunity!! Thanks Again,
    Michele
    Revolution Herald

    • Gene Takagi

      Michele, the purpose statement generally looks okay to me, but you may want to consider whether operating a school is the true purpose or educating students, including failing and at-risk youth. Thank you for the nice words. – G

  4. Marie

    What I’d the difference between public and charitable on the California article of incorp. I am trying to decide which on to choose if not both.
    Also, on the California article of incorp is it okay to like my home address if I don’t have a office for my nonprofit yet.

    Thank you for all your help.

    • Gene Takagi

      Marie, it’s a good question without a definitive answer of which I’m aware. Generally, “charitable” in the context of the California Nonprofit Public Benefit Corporation Law is used for organizations seeking exempt status under 501(c)(3), while “public” is used for organizations seeking exemption under 501(c)(4). But many 501(c)(3) nonprofit public benefit corporations put down both charitable and public, thinking they are covering all their bases or that it’s appropriate because they take in significant government funding. Note, however, that “charitable” is interpreted very broadly (I don’t think “public” really adds anything to what a 501(c)(3) organization can do) and having a “public” purpose will be a disqualifying factor for property tax exemption under the welfare exemption.

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