Does an LLC Need a Business Purpose?

By Roberta Codemo

Does an LLC Need a Business Purpose?

By Roberta Codemo

A limited liability company, or LLC, is a business structure commonly favored by small businesses that combines the limited liability protection of a corporation with the tax benefits of a partnership or sole proprietorship. In order to create an LLC, you must file articles of organization—also known as a certificate of organization or a certificate of formation , depending on what state you live in—with your state's business filing office, usually the Secretary of State's office, and pay a filing fee.

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The articles of organization contain basic information, such as the business purpose, about your business. State laws vary, so know what information your state requires when drafting your articles of organization.

Articles of Organization

The articles of organization act as a charter for the LLC and must be filed in the state where you do business. As a rule, most states require the articles of organization to include the following information:

  • Business name
  • Name and address of registered agent
  • Legal address of the business
  • Business purpose
  • Names and addresses of members/managers
  • Name and address of the organizer
  • Management structure
  • Duration of the business
  • Authorized signatures

Business Purpose

The business purpose is usually one or two sentences long and sets out the reason why you formed the business. Not all states require you to include a business purpose in the formation documents. In states that do require a business purpose, a general statement that includes broad language such as “to engage in all lawful business activity" is usually sufficient. Some states, however, require a legal business purpose statement that includes specific language that identifies your industry and what your business does. Even if your state does not require a business purpose, it's a good idea to include one in your articles of organization, as the business purpose protects the LLC should it engage in activities outside its scope of business.

Ultra Vires

Roughly translated, the term "ultra vires" is a legal doctrine that means “beyond the power." Historically, under the doctrine of ultra vires, if an LLC or its managers performed business acts that were outside the scope of its formation documents, the acts would be held invalid. Today, the doctrine is mostly obsolete because most states, such as Texas, have enacted statutes that now allow an LLC to include language that states it intends to engage in “all lawful business" in its business purpose. That means that it's almost impossible for an LLC that contains this language in its business purpose to exceed its scope of business.

Limited Liability

Similar to a corporation, an LLC offers its owners protection from personal liability for business debts and claims. This is called “limited liability" and means if the business cannot pay its creditors, such as a supplier, the creditor cannot come after the assets of the members. The members' losses are limited only to their investment in the business.

In rare cases, however, owners can lose this protection if they commit a fraudulent or illegal act that harms either the business or another person. In these situations, the courts can hold the owners personally liable for the debts of the business. This is called “piercing the corporate veil." The courts look to see if the LLC has a clear business purpose or if the owners are doing business as individuals rather than as a separate legal entity.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.