Corporate Purpose: Does It Matter?

by | Jun 30, 2020 | Corporate Law, Formation, Nonprofit Law

Corporate purpose defines the outer limitations on what your corporation is permitted to do. Historically, the corporate purpose was very important because corporations were prohibited from asserting general-purpose statements. However, modern corporate reform removed these limitations, and corporations may now use general-purpose statements – and indeed most do.

Corporation Purpose: Historical Perspective

Historically, the corporate purpose was crucial because corporations were limited to the activities described in the purpose. Indeed, some older corporations still retain their old Articles of Incorporation (or, alternatively, Articles of Association) which limit their business activities. If a corporation acted outside these purposes, it could be subject to an ultra vires action. Ultra vires is a Latin phrase that means “beyond the purpose.” Ultra vires actions meant that the corporation acting beyond its legal authority.

For example, the original Ford Motor Company articles of association defined its purpose as “the purchase, manufacture, and placement on the market for sale of automobiles or parts of automobiles and the purchase, manufacture, and placing on the market for sale of motors and of devices and appliances incident to their construction or operation.” Basically, Ford was a car company. If Ford started manufacturing asphalt or rebar, it could have been subjected to an ultra vires action by its shareholders.

However, these are historical anomalies. Corporations are hardly ever subject to ultra vires actions because they are no longer required to specifically define their purpose.

Purpose Statements: Modern Reform

Under modern corporate law, most corporations may engage in any lawful purpose. Corporations may but they are not required to limit themselves outside of a few exceptions. For example, in California, non-profit corporations are limited to the public good or charitable purposes and must remain in compliance with the Internal Revenue Code (federal law), religious corporations are limited to religious purposes, and mutual benefit corporations are limited to providing benefits to their members (common examples are food collectives).