The Ultra Vires Doctrine and Nonprofits: Know Your Plan and Stick to It

It is a well-established principle that the directors of a nonprofit corporation must serve the corporation in good faith and act in the best interests of the corporation.   Any conduct that falls short of this standard runs the risk of being nullified under a doctrine known as “ultra vires.”

The term ultra vires literally means “beyond strength”, or “beyond power.”  In the context of nonprofit corporations, the term is used to describe the manner in which those acting on behalf of a nonprofit are bound to adhere to the organization’s bylaws and articles of incorporation.

Nonprofits often draft bylaws and articles with a focus an organization’s promotion of a specific goal.  Ultra vires helps keep that focus by nullifying agreements and conduct outside of the scope of these documents.  In order to receive tax-exempt status with the IRS, a nonprofit’s articles of incorporation must limit the corporation’s purposes to one or more of the exempt purposes set forth in Section 501(c)(3) of the Internal Revenue Code:  “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.”

If the articles include a purpose statement that does not fall within one or more of the exempt purposes, the corporation may fail the 501(c)(3) Organizational Test, which may result in a denial of tax exemption.  Because this risk of exemption denial is there, many organizations include in their articles of incorporation a “catch-all” clause that contains language such as:  “Notwithstanding anything herein to the contrary, the purposes of this corporation are limited to exclusively to exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.”

Some attorneys recommend a very broad purpose statement in the articles of incorporation.  The reason for this is because, with a broad purpose statement, there is a lower risk that someone acting on behalf of the organization will have his actions voided under the ultra vires doctrine.  Another reason for wording your purpose statement in broad terms is to avoid the need to amend the organization’s articles and/or bylaws every time the organization adds a new program or takes a slightly new direction.

However, your organization may want to employ a more specific purpose statement in its articles or bylaws.  One reason for doing this is to solidify the organization’s mission and to prevent future boards from straying from the organization’s original intended course.

In any event, nonprofits should choose their purpose statement carefully, taking into consideration the goals of their organization and the specific needs the organization seeks to address, as well as the legal issues discussed in this eBulletin, including the ultra vires doctrine.   You should consult a nonprofit law attorney when dealing with these types of questions.

Please feel free to contact Elliott & Davis, PC with all of your questions about nonprofit formations and management.  Elliott & Davis is a full service law firm with expertise in the areas of nonprofit law, civil litigation, corporate law, real estate law, estates & trust, immigration law, entertainment law, civil rights law and domestic relations law.  For more information about these or any of our other practice areas, please visit our website at: www.elliott-davis.com.

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