Ask an owner why his company exists and you get one of two answers. Some people answer straight away, and the answer has a business in it: it holds the shares in the Romanian operation, we set it up when the two families went into the project together, it owns the building. Other people pause, and then start explaining how the structure works. The second answer is the one that causes trouble later, because that was not the question.
The question comes up more often than owners expect, and the people asking it have ordinary reasons. A bank asks when the account is opened, and again when the file comes up for review. A buyer's lawyers ask in due diligence. A new director asks before he agrees to join the board, or he should. A son or daughter asks when the shares arrive and they have been given something they did not choose. Cyprus tax law asks a version of it too, where a company sits above a shareholding: two tests ask what that company does apart from change who receives the dividend.
The reason is obvious when the company is formed
When a company is being set up, everybody involved knows exactly why. The reason is usually a good one and it is being talked about that week, in meetings and over dinner. It is so obvious to everyone in the room that nobody thinks to write it down. The constitutional documents say what the company is allowed to do, which is more or less anything, and the first minutes say that directors were appointed and a bank account was opened. The reason itself does not get written down anywhere.
Then six or eight years go by and somebody asks. The people who had that conversation have gone. A partner has retired, the adviser who set it up has moved firms. The owner remembers, and he is not wrong, but he is remembering a decision from eight years ago and explaining it against a business that has changed since. None of this is a legal problem and nothing is being filed anywhere. It is just harder than it needed to be.
Everybody knows why the company is being set up, in the week it is being set up. That is also the week nobody writes it down.
There is no shortage of places to put it. A board minute will do. So will a shareholders' agreement. They are just not used for this. Two paragraphs in the first board minute would take ten minutes, and it is almost never done.
What a statement of purpose contains
It is short. One page is usually enough and two is plenty, in ordinary language, written when the company is set up or at the first meeting of the board. This is not a form anyone files or a box anyone ticks. It is a document the board writes for itself.
It says what the company is for, in concrete terms rather than general ones. It holds the shares in the trading business. It owns the building and lets it. It employs the four people who run the region. It takes the loan the bank will not give to a person. It receives the family's investments so they sit in one place and can be split later.
It says what problem that solves. Not in the abstract: the actual thing that was awkward before and should not be awkward afterwards. Three brothers who each held shares directly and now need one voice at the general meeting. A lender that will only deal with one borrower. A business running in two countries with nowhere that the accounts came together.
It says who takes the decisions and where, how often the board expects to meet, and which decisions the board keeps for itself instead of delegating.
And it says what the company should look like in three years: what will be on the balance sheet, what it will be doing, roughly what it will cost to run. Owners tend to skip that part, which is a pity, because in three years you can go back and read it against what actually happened. None of this needs legal language.
Whose reasons go into it
The adviser usually holds the pen. Hand an owner a blank page and nothing comes back. But the reasons have to be his, and in his words, for a simple reason: he is the one who will be asked. When he is asked he will be talking, from memory, and the document will be sitting in a file.
Family advisers have known this for years about the letter of wishes that goes with a trust. It carries much less weight when it reads like the adviser rather than the settlor. The same thing happens with companies.
Then the board adopts it. It goes on the agenda of the first meeting, the directors discuss it and adopt it, and it is kept with the minutes. That matters, because it means all of them have put their name to one account of the company at the start, instead of each of them explaining it separately from memory years later.
Reading the statement again each year
A statement written once and never opened again goes stale in a particular way. It still describes the company accurately, but it describes the company as it used to be.
So it gets read once a year. The obvious place is the board meeting that approves the accounts, because the year's activity is already in front of the directors. It sits next to the harder question of whether the structure still earns what it costs. Neither of those questions appears anywhere in the annual compliance cycle, so if a board wants them asked, it has to put them on its own agenda.
The question they are answering is whether the company did, that year, what the statement said it was for. There are three possible answers and all three go in the minute.
Yes, and the minute says the statement was reviewed and is still accurate.
Partly, which happens for good reasons as often as bad ones. The directors rewrite the statement to say what the company is for now, and the minute says what changed and why.
No, and the minute says that too. The directors then have a decision to take: adopt a new purpose they actually intend to pursue, or put the winding up of the company to the shareholders, which in the normal case is theirs to decide rather than the board's.
A statement of purpose has to be true
This is not a tax opinion, and it does not replace actually doing the things it describes.
Directors should not adopt a description of something the company has no intention of doing. The document is only worth having if it is true, and a board that adopts one it knows to be untrue has formally minuted a plan it does not intend to carry out.
The same problem turns up more quietly with a statement that was true on the day it was adopted. If the company drifts away from it and nobody rewrites it, what sits in the file is the company's own description of something it stopped doing, and anyone reading that next to the accounts can see the gap. That is what the yearly read is for. It is also why there is no point writing one up after the event and dating it earlier. We do not do that, and it would not help if we did: a document produced late is worse than one that was never there.
The cheapest moment to answer the question is at the start, because at the start there is nothing to explain away. You are writing down what you are about to do, before any of it has happened. A board writing one in year eight has eight years of history to be consistent with, so it takes longer, but it can be done. What does not work is leaving it until somebody asks.