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Are there risks if nonprofit acts outside its stated purpose?

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Are there risks if nonprofit acts outside its stated purpose?

Our town's historical society is considering using a huge proportion of a large new donation toward building a modern community center rather than a project that preserves history. I understand that building a community center would be a charitable purpose, but are there risks to a 501(c)(3) organization acting outside its stated purpose?

The most immediate risk is from the donor. Would the use of the gift be within the purpose of the gift as given by the donor? If not, the donor, who may or may not have standing to sue, or the Attorney General could challenge the board on the use of the funds.
Assuming the donor has no problem with the project, then the question is whether it is really outside the stated purpose of the organization. Substantively, it may be intended to present the local history in a different context in a dual use building that may be entirely within its stated purpose.
If the organization’s purpose, as spelled out in its articles of incorporation and bylaws, are generally charitable, with an included purpose as an historical society, it may not be outside its stated purpose. That is why we write articles of incorporation and bylaws to be as broad as possible. (See Ready Reference Pages: “Articles of Incorporation Establish Basic Form of Nonprofit Corporations” and “Bylaws Function as ‘Constitution’ of Nonprofit Corporations”)
If the governing documents (as opposed to a mission statement) are not sufficiently broad, it may be possible to amend their purpose to be sure they include the right to develop a community center. That would probably cut off the possibility of a successful challenge from anyone other than the donor or Attorney General seeking to enforce the terms of the gift.
Failing to act within the stated corporate purpose does have some risks. Voting members, if there are any, or dissident members of the board of directors could sue to stop the activity. The Attorney General could sue, even though that seems unlikely if the donor does not complain. At its most drastic level, the failure to act within the stated purpose of a nonprofit became a count in the indictment of a former Pennsylvania state senator who was ultimately convicted on multiple counts of misuse of corporate and state funds. (See Ready Reference Page: “Indictment Spells Out Claims of Benefit, Obstruction of Justice by State Senator”) That is an overreach, but it is an example of how bad it can get.
You may have an entirely opposite approach from mine and may believe activities should be limited within a specific narrow area. I like more flexibility and less risk of adverse legal consequences when people generally agree on a change but fail to change the governing instruments.
Tuesday, July 22, 2014

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