It’s important to choose your business purpose carefully when forming your limited liability company (LLC) to avoid legal issues in the future.
Here’s everything you need to know about your business purpose:
What Is an LLC Purpose Statement?
“LLC purpose statement” and “business purpose statement” are terms that describe your limited liability company’s purpose. In other words, it’s an explanation of why you started your limited liability company (LLC) and what sort of business your company conducts.
There is typically a section on your LLC Articles of Organization form or other LLC formation documents issued by your government agencies labeled something like “Business Purpose for LLC.” This is because most states consider a purpose statement to be vital information on par with other details about your LLC, like your registered agent’s name and address, or your business name.
Your LLC purpose statement isn’t required to be long and detailed. It can be as short as a sentence or two, with other details being hammered out in your LLC operating agreement.
An LLC purpose statement and a mission statement are legally distinct. Your LLC mission statement typically specifies who you serve, your values or commitments, your company’s vision, and typically serves to tell customers and investors what they can expect from your LLC. A purpose statement, on the other hand, describes the type of business your LLC will conduct and the types of lawful business activities it will take part in.
You can create a purpose statement tailored to your industry and specific business activities, or you can create a general purpose statement that covers all the business activities legally permitted for an LLC in your state so your company can grow and change over time or take a new direction if need be. This is largely dependent on your state’s requirements and the information required on your formation documents.
Most states only require a general purpose statement, while other states require a specified business purpose. Some states (Alaska, Arkansas, Mississippi, Georgia, Louisiana, New Hampshire, and New Mexico) require NAICS (North American Industry Classification System) numbers rather than business purposes. NAICS numbers allow government agencies to determine which industry each LLC in their state is in. So, check out your state’s requirements before you choose which type of business purpose you want to create for your LLC.
Why Does a Limited Liability Company Need a Business Purpose?
The main reason that limited liability companies need business purpose statements is in regard to personal liability.
Many business owners choose to form an LLC because of the limited liability and personal asset protection that LLCs afford. If your LLC is sued, the court will likely check your business purpose to find out which assets fall under your LLC’s purpose. If you have listed a general purpose statement on your LLC’s Articles of Organization, it’s pretty easy for a judge to determine that many assets and business activities aren’t covered under your vague description even though your wording was ambiguous enough to cover all legal acts permitted to LLCs. Your LLC has a little more legal coverage with a more specific purpose statement, but this means that if your LLC takes part in other legal acts beyond the lawful activity listed in your business purpose, you could be held personally liable if your company is sued.
Furthermore, if a business has an unstated purpose, or a judge determines that it’s an overly vague general purpose, then they could declare that your business is an alter ego and rule that you pay any monetary judgments made against you and your small business as an individual.
LLC members and board members can petition the court to dissolve your company if they feel that it can no longer fulfill its business purpose in a reasonable way. This typically occurs when the business purpose is an ambiguous general statement, if the lawful act described in the business purpose is no longer being conducted by your business (maybe it’s taking a new direction), or if LLC members are silently in the process of dispute resolution on several contracts and agreements.
Because of all the legal protections your business purpose statement can provide your LLC, it’s important that you give it due consideration and thought. The language and each legal action described in the business purpose for your LLC are crucial for long-term business success.
LLC Business Purpose Statement Examples
Most state laws require only a general business purpose statement, while others require specific purposes. And if you choose a professional limited liability company (PLLC) that provides professional services that require state licensing (such as accountants, locksmiths, etc.), then you’ll need a specific purpose, as well.
Here are a few business purpose examples to inspire you.
“The purpose of Your Small Business, LLC, is to conduct all business activities permitted and conduct business in accordance with _____ state law.”
“The purpose that ABC, LLC was formed is to perform any and all activities that a limited liability company is permitted to perform in the state of _____.”
“The purpose of Real Real Estate LLC is to own, buy, sell, hold, and maintain real estate in (state), as well as performing all business activities permitted by LLCs in (state).”
“Build It and Sell It, LLC seeks to engage in activities such as property acquisition, purchase, sales and construction, as well as other activities and lawful purposes permitted by limited liability companies in the state of ____.”
“Generic Tech Company LLC’s purpose is to research and develop new block-chain technologies, as well as creating an online publication and paid subscription newsletter.”
“Learn With Us, LLC’s purpose is to provide programmers with online courses in written, video, and audio formats. It will also serve as a nationwide recruiting network.”
If you choose a specific purpose, then you need to include the specific actions associated with businesses in your industry, but you also need to leave room and add language that allows for growth and innovation as well.
Here are a few phrases you can use in your business purpose statement:
- Logistics and manufacturing of medical supply devices
- Sale and purchase of, as well as investment in, real estate
- Freight services nationwide for the furniture industry
- Retail operations and packing for a frozen yogurt shop
Business Purposes in Just a Few Words
Many states don’t require you to list a lengthy, detailed purpose. In these instances, you can choose to describe your business purpose in a handful of words. Here are some examples of business purposes in just a few words:
- Coffee shop, cafe, or coffee distributor
- Pizza shop or parlor
- Diner, restaurant, bistro, or pub
- Gym, fitness center, or yoga studio
- Online retail store
- Computer repair services
- Shipping and logistics
Can You Change Your Business Purpose Statement Later?
What if you’re not sure that the services you offer now will always be offered by your company, or if you decide to offer additional services later? Of course, it helps to add a statement about “all lawful purposes and activities permitted by the state” to make sure your bases are covered. But it’s also helpful to know that you can change the business purpose statement of your small business as well.
Most states only require business purpose statements for statistical purposes, so the process to change it in the future isn’t difficult.
If your state requires you to list a business purpose in your formation documents, you can typically change the purpose by completing an LLC Articles of Organization Amendment form and submitting it to the relevant government agency in your state (typically the Secretary of State).
If you’ve specified the business purpose in your LLC operating agreement, you will need to amend your operating agreement along with your formation documents. This is usually accomplished by all the board members voting and approving the amendment.
Your LLC’s business purpose statement is one of the most important decisions you’ll make for your company, on par with your Articles of Organization and operating agreement. Although you need to choose the wording of your business purpose carefully to avoid potential legal issues with personal liability in the future, most states don’t have strict requirements regarding purpose statements, which means they can be accomplished with just a handful of words or a sentence or two. And the best part of choosing your business purpose is the fact that you can change it relatively easily at any point, so there’s no pressure to perfect it the first time.
While you’re here learning about how to create a business purpose statement, check out my article about the best LLC formation services here.
It’s also a good time to choose a business structure while you’re completing your business filings, if you haven’t already. For more information about LLC formation, read “How to Start an LLC in 5 Simple Steps: A Complete Beginner’s Guide” here.