Has your business ever been asked to provide a “Certificate of Good Standing”? This state-issued document is something you always want to be able to provide if asked. Doing so, however, means keeping your entity in compliance with state filings and other requirements.
After a corporation, limited liability company (LLC), or other entity is formed, the entity needs to maintain “good standing” status in state records. Ensuring the entity’s “good standing” status at all times helps to
- Preserve the limited liability that using an entity provides
- Expand into other states
- Quickly obtain a “good standing” certificate for lenders
- Avoid state-imposed fees or penalties
Lenders may require a Certificate of Good Standing to approve financing. Maintaining good standing helps to avoid delays caused by trying to update your status with a state agency in the middle of a deal or loan.
The meaning of Certificate of Good Standing
Generally, a Certificate of Good Standing simply indicates that the entity has filed all reports and paid the necessary fees with the Secretary of State’s office. It serves as proof, or evidence, that the entity exists and is authorized to transact business in the state.
Business entity laws vary among the states. The document the state provides may be called a “Certificate of Good Standing”, a “Certificate of Existence”, “Certificate of Authorization”, or something similar.
How does a business lose good standing?
The “proof” concept behind a good-standing certificate is fairly simple. However, any failure to maintain good standing is a compliance red flag that needs immediate attention.
Common reasons why an entity loses “good standing” status include —
- Failing to timely file annual reports
- Failing to appropriately maintain a registered agent or registered office
- Failing to timely pay franchise taxes
A requirement for doing business in other states
A Certificate of Good Standing is often required in order to register to do business in other states. Registering to transact business in a state other than your state of formation is generally called foreign qualification.
Defining "foreign"
“Foreign” usually means a different country. In this context though, “foreign” simply means a different state. A corporation or LLC is “domestic” in its state of formation and “foreign” in other states.
For example, a business that was incorporated in Ohio is a domestic corporation in the state of Ohio. It is a foreign corporation in other states.
Many states will not authorize a company to transact business in their state unless the business provides a Certificate of Good Standing from its state of formation.
Certificate of Authorization
A “Certificate of Authorization” for a foreign corporation is similar to the “Certificate of Good Standing” for a domestic corporation. The Certificate of Authorization generally sets forth that a foreign corporation (i.e., a corporation formed in another state) is authorized to transact business in the state.
For example, a business incorporated in Ohio generally would obtain a “Certificate of Good Standing” from Ohio. It would obtain a “Certificate of Authorization” from other (i.e., foreign) states.
The consequences of not being in good standing
If your business is out of compliance with state laws or requirements, the result is generally an adverse status change with the state.
Some states provide generous opportunities for correction before imposing an adverse status change, but others do not.
A state may impose fines or penalties on companies that fail to comply and lose good standing.
A compliance failure could even result in the administrative dissolution of the entity and the loss of limited liability protections for the individuals involved
It’s important to check your entity’s status with the state on a regular basis, ideally monthly. Depending on your business structure, doing this manually could be time-consuming and cumbersome, but it’s well worth the effort.
There is entity management software that can be helpful in monitoring good standing status. Also, a full-service registered agent can provide expert help in monitoring your entity and notifying you of any status changes.
Conclusion
Many small business owners elect to "outsource" their entity compliance to companies that specialize in providing these services efficiently and economically, such as BizFilings. (On-going compliance management can be provided as a stand-alone service, but is included with registered agent services.)
Using compliance professionals frees you up to concentrate on running your business.