What are the purpose and dissolution clauses for nonprofits

When applying for 501(c)(3) tax-exempt status, the IRS has found that the number one reason for the delay in insurance of determination letters (the letter that confers your organization with tax-exempt status) is the absence of the all-important purpose and dissolution clauses in an organization’s Articles of Incorporation.

Many states do not require these provisions to be included in an organization’s documents when filing for incorporation; thus, many people do not realize that these clauses are required for gaining 501(c)(3) status with the IRS. This is particularly important for organizations that are not eligible to file Form 1023-EZ, as form 1023 requires applicants to identify where the purpose and dissolution clauses are located in an organization’s Articles of Incorporation. If your organization does not have the proper clauses written in its Articles, an amendment to the Articles will need to be filed before submitting form 1023, and the amendment will need to be included in the organization’s application for 501(c)(3) tax-exempt status.

Purpose Clause:

The purpose clause is a statement that describes the organization’s reasons for operation. To be eligible for 501(c)(3) tax-exempt status, an organization’s purpose must be exempt in accordance with what the IRS defines as charitable. One example of an acceptable purpose clause, as provided by the IRS, is, “The corporation is organized exclusively for charitable, religious, educational, or scientific purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.”

Dissolution Clause:

The dissolution clause is a statement that explains what said organization will do with its assets in the event that the organization dissolves. This clause is particularly important given that the assets of a nonprofit are not owned by any person or group. A nonprofit may dissolve in the event that the organization has fulfilled its mission if it faces challenges too great for the organization to overcome, or if a nonprofit decides to merge with another organization.'

One example of an acceptable dissolution clause, as provided by the IRS, is, “Upon the dissolution of this corporation, assets shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose.”