When business owners choose to form a corporation or LLC they must file the proper formation documents with their home state and the proper registration document where they do business. The states then essentially grant the right to conduct business as a statutory business entity with all the advantages this brings. To maintain this right, the corporation or LLC becomes subject to various state laws and requirements. These include appointing a registered agent, making timely filings of required forms, and paying fees and/or franchise taxes – which are requirements of the state corporation or LLC statute.
What does “good standing” mean?
As long as the corporation or LLC complies with all of its statutory requirements, it is designated as being in “good standing” on the state’s records, and keeps all the rights and privileges of doing business as a statutory entity.
However, entities that don’t stay on top of their compliance obligations can lose their good standing status. The corporation or LLC will instead be considered “delinquent”, “void”, “suspended”, “forfeited”, or “dissolved”.
The meaning and severity of these terms vary depending on the state, which compliance requirements were failed, and the duration of the failure.
What happens if a corporation or LLC is not in good standing?
All corporations and LLCs should be aware of the serious consequences that losing good standing status can have, including these:
- Possible loss of access to the courts. This may be one of the most serious consequences and one that many are not aware of. In many states, a company that is not in good standing may not bring a lawsuit in that state until good standing is restored.
- Difficulties in securing capital and financing. Most lenders view a loss of good standing as an increased risk and may not approve new financing to a company not in good standing.
- Tax liens. Adverse entity status due to non-payment of taxes can result in a tax lien. Lenders are extremely wary of tax liens since they take priority over other liens.
- Loss of name rights. Once an entity loses its good standing status, it risks losing the right to use its name in the state. Other companies may be able to acquire the rights to their name while a company is sidelined due to loss of good standing.
- Administrative dissolution or revocation. In a worst-case situation where a corporation or LLC repeatedly fails to respond to requests for required filings, it can be administratively dissolved by the home state or revoked by the foreign states.
- Fines and penalties. States impose fines and penalties on companies that don’t comply with the requirements that led to the loss of good standing.
- Personal liability. In addition to fines and penalties levied on a company not in good standing, some states also hold individuals personally liable for conducting business on behalf of a company while it has a “revoked” status. These penalties can be severe and levied on each officer, director, or employee who knowingly acted on behalf of the non-complying company.
- Business identity theft. Business identity thieves look at the state’s records to see which companies are not in good standing, assuming no one is paying attention. They then “use” the company’s identity to buy goods, borrow money, or take other harmful actions.
What causes the loss of good standing?
The primary reasons a corporation or LLC loses its good standing status are:
- Failure to submit annual reports (or complete annual registration) on time
- Failure to pay franchise taxes promptly
Loss of good standing can occur at the worst possible time for businesses, such as at the closing table for an expansion or financing deal or when applying for a government-backed loan that is first come first served. Loss of good standing can happen in many ways, and for many reasons, these issues can remain undetected.
Voluntary status changes. An entity’s status can change several times during its business life cycle. Status changes that are driven by the business itself frequently trigger new annual report or franchise tax requirements. These include mergers, acquisitions, expanding into new locations or converting entity types. It’s also important to note that when closing a business, owners remain liable for all required filings, taxes, and penalties until they file official dissolution or withdrawal forms with every relevant state.
States change requirements. States often change deadlines, raise fees, or issue new forms. For various reasons, businesses may not know about the changes – notifications may not be sent or are directed to the wrong person, or the importance of the communication is overlooked.
Weak internal processes.Maintaining entity status is often not a core responsibility and is sometimes spread across different departments such as legal, tax, and finance. Even in businesses that have designated entity maintenance teams, employees may be relying on tools and processes that are inadequate for monitoring both entity information and state laws and requirements.
Additional business compliance obligations
Businesses also have other compliance obligations, including tax and business registrations, as well as employer responsibilities. These requirements vary depending on the business type and location.
However, almost every business must obtain one or more business licenses or permits, whether at the federal, state, or local level.
Corporations and LLCs may also need to file a beneficial ownership information (BOI) report with FinCEN. This is a new requirement from the federal government under the Corporate Transparency Act (CTA) that applies to any corporation, LLC, or other entity that was formed in the U.S. by the filing of a document (such as Articles of Incorporation) with the Secretary of State or other office. It also applies to businesses formed or registered in a foreign country that are registered to do business in a U.S. state through the filing of a document with a Secretary of State or similar office (unless otherwise exempt).
Companies who fall under the CTA, known as “reporting companies,” must also report any beneficial ownership changes or updates to previously provided information within 30 days of the change.
Other compliance obligations to consider include corporate governance compliance, maintaining a registered agent, and more.
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