Every business has a purpose.
There is a difference, however, between the general notion of a purpose (often related to defining your brand and how it engages your customers) and the legal definition: the specific business intent for which your company has been formed. In many states, you are required to list a legal business purpose on your formation documents.
Entrepreneurs can be forgiven for overlooking their business purpose. After all, in some states, it isn't even required, and in states where it must be included, state law generally allows vague and all-encompassing language: To pursue any and all legal business activity.
This article aims to help entrepreneurs better understand the intent and importance of a business purpose.
What is a Business Purpose?
Your business purpose is the reason you have formed your company, boiled down to a single sentence (or two). It can be industry-specific or general enough to include ancillary and future business activities.
To understand the business purpose, it is important to distinguish it from your company's vision or mission. The latter concepts are critical to the success of your business but are legally distinct from a business purpose.
Vision/mission as listed on company websites:
- Google: Google's mission is to organize the world's information and make it universally accessible and useful.
- Microsoft: At Microsoft, our mission is to enable people and businesses throughout the world to realize their full potential.
Compare those missions to the business purposes listed on each company's Articles of Incorporation:
- Google: The purpose of this Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
- Microsoft: The Corporation is organized for the purposes of transacting any and all lawful business for which a corporation may be incorporated under the Washington Business Corporation Act.
General vs Specific
The examples above are considered for general business purposes. Notice the language says nothing about what either Google or Microsoft actually do. For many states, a general purpose is sufficient: you are organized to pursue lawful business in (fill in your state).
Some states, however, require an additional specific business purpose. Usually, this is nothing more than another sentence or two identifying your particular industry and what role your company undertakes. While this is satisfactory as far as state laws are concerned, some companies write a far more detailed purpose.
General Electric, for example, has a four-point purpose, the first of which is:
• To manufacture, process, construct, develop, assemble, and produce in any way; to sell, lease, supply, and distribute in any way; to purchase, lease, mine, extract, and acquire in any way; to own, operate, experiment with, deal in, service, finance, and use in any way, equipment, apparatus, appliances, devices, structures, materials, processes, information, tangible and intangible property, services and systems of every kind, nature and description.
And that's just the first point.
Whether your purpose is general or specific, it is important to give it due consideration. When entrepreneurs are sued for personal liability, one element the court will look to is a clear business purpose that demonstrates your company is not merely an alter ego. Where courts find unclear purposes—or worse, no purpose at all—judgments can be harsh.
Business Purpose and Dissolution
It is easy to overlook your business purpose and forget that it can drastically impact your company's future. In fact, your company can be dissolved because of your business purpose.
Your business purpose defines the reason for your company's existence. If it becomes implausible to reasonably fulfill that purpose, a member or shareholder can petition the court for judicial dissolution.
In a 2009 Delaware case, Fisk Ventures, LLC v. Segal, the Delaware Court of Chancery, for example, ruled in favor of judicial dissolution. In making his decision, Chancellor Chandler wrote: “If a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.”
In this instance, Fisk Ventures LLC was governed by a five-member board that required 75% approval for management decisions. A faction of board members refused to attend meetings for almost two years, stalling company management. This stalemate, while allowed by the company's operating agreement, ultimately undermined the LLC's purpose and led to the courtroom.
Contracts and Governing Documents
The above case illustrates how your business purpose does not operate in a vacuum. Had the LLC's operating agreement included a path for handling management disputes, Fisk Ventures may still be operating. Unfortunately, the interplay of purpose and governing document left members nowhere to turn except the courts.
Also relevant to your business purpose are other contracts or agreements which may influence the purpose of your company. For example, in Meyer Natural Foods LLC v. Duff, the Delaware Court of Chancery made its ruling by looking beyond the business purpose to three other documents: the operating agreement, an Output and Supply Agreement, and specific non-compete covenants.
The case concerned the plaintiff, Meyer Natural Foods, and the defendants, Kirk and Todd Duff. All three were members of Premium Natural Beef LLC. The court acknowledged that PNB's business purpose was not ambiguous: “to market, distribute and sell natural beef.”
Additional agreements, however, narrowed this goal by allowing Meyer, the LLC's manager, to only receive beef from suppliers controlled by the Duffs. When disputes arose between the members, the Duffs stopped supplying beef to Meyer, ultimately leading to an inability to fulfill the company's purpose.
Had the Output and Supply Agreement and non-compete covenants allowed Meyer to purchase beef from other suppliers, there would have been no impediment to PNB's purpose, a fact the court acknowledged in its decision.
What is important here is not the facts of a specific case, but the broader implications: your business purpose does not stand alone, but rather it works in conjunction with other contracts, agreements, and documents executed by your business.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.