Business purpose: Overview, definition, and example
What is business purpose?
Business purpose refers to the specific activities, goals, or objectives for which a company is established and operates. It defines what a business does, the industry it serves, and the type of products or services it provides. A clearly defined business purpose helps guide decision-making, attract investors, and ensure compliance with legal and tax requirements.
For example, a bakery’s business purpose might be “to produce and sell fresh baked goods to local customers,” while a software company’s business purpose could be “to develop and provide cloud-based accounting solutions for small businesses.”
Why is business purpose important?
A well-defined business purpose provides direction for the company and ensures that all activities align with its core mission. It also helps with legal and tax classification, as businesses often need to state their business purpose in their incorporation documents or contracts.
For SMBs, having a clear business purpose helps with strategic planning, branding, and regulatory compliance. It also reassures customers, partners, and investors that the company has a clear vision and focus.
Understanding business purpose through an example
Imagine a small consulting firm that specializes in marketing strategy. Its business purpose, as stated in its incorporation documents, is “to provide digital marketing and brand consulting services to startups and small businesses.” This ensures that the company operates within its intended scope and is recognized as a legitimate business.
In another case, a business applying for a loan may be required to state its business purpose. A retail store owner might describe their business purpose as “selling high-quality clothing and accessories through online and physical store locations.” This helps lenders understand the nature of the business and assess its financial viability.
An example of a business purpose clause
Here’s how a business purpose clause might appear in a contract or incorporation document:
“The Company is formed for the purpose of engaging in [specific business activity], including but not limited to [additional related activities]. The Company may engage in any lawful business activity permitted under applicable laws.”
Conclusion
A clear business purpose helps define a company’s operations, ensuring strategic focus and legal compliance. For SMBs, articulating a business purpose in contracts, business plans, and legal documents helps guide growth, attract investment, and maintain credibility. Whether for incorporation, funding, or branding, a well-stated business purpose ensures clarity and direction for long-term success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.