What is the Purpose of My Company
While it is certainly easy to set up a corporation or a limited liability company (also known simply as an LLC) in the 21st century, there are still good reasons to consult an attorney when doing so. Failing to consult a business planning attorney might lead the business owner to incur personal liabilities that they did not need to incur, and in fact, thought they were avoiding. The problem lies in history and in what they list as the purpose of the new company. Here’s why.
Many people in forming corporations, and the new variant – LLC’s – do not fully appreciate the importance of listing the purpose of the company. As a result, I often see articles of incorporation or organization that state the company has been formed for a very specific purpose, such as to “operate a dine-in restaurant.” Over time, the business may expand such that it now does catering and delivery. Absent an amendment to the purpose clause, the company is not really acting within its grant of authority. If someone were injured in this circumstance by the company’s actions, the owners might find out that they have unlimited personal liability for the injuries sustained by their customer because they are acting outside the scope of the company’s grant of authority.
The purpose requirement for a corporation or LLC is rooted in the history of our country’s formation and the notion of social responsibility. It used to be that the grant of limited liability for a company required an act of Congress or state legislature. To grant limited liability to a company went against the thought that businesses should be held responsible if they injured their customers or third parties. However, Congress and legislatures realized that certain commercial activities required a great amount of capital and entailed great risks. A classic example would be railroads. To help encourage these types of commercial activities, corporations could be formed and created with a corporate charter.
As part of the corporate charter, companies would only be authorized to engage in specific, detailed purposes. For example, a charter could be granted to allow a company to build and operate a railroad from Philadelphia to St. Louis. Individuals who invested in this company would not be subject to personal liability for injuries or other losses, so long as the company operated within the stated purposes of its charter. However, if the company acted outside its limited scope of authority, say operating a stage coach, then it would be said to be acting ultra vires, or outside the scope of its charter. If someone were injured in this outside activity, then the company and its investors may not have limited liability.
As laws evolved and social norms continued to change, the concept of limited liability became more socially acceptable. This change coincided with the American Dream of pursuing financial freedom through owning your own business. As a result, forming a corporation, or now, a limited liability company, became much easier. Today, in Missouri, this is accomplished by simply filing the appropriate articles of incorporation or organization with the Secretary of State and paying a nominal fee. The Secretary of State even provides forms and allows for online filing. But beware, doing so yourself is not without some risk. One of the ways to help limit this risk is making sure that you have a properly drafted purpose clause for your new company.