Maintaining a good standing status for your LLC or corporation with your formation state and all states in which you do business is critical to your business’ success.
Why is this so important? Lenders, investors, and vendors often require a Certificate of Good Standing before doing business with any company. Many states require a Certificate of Good Standing to register your company as a foreign business corporation or LLC (foreign qualification).
A Certificate of Good Standing is a document provided by a state’s business entity filing office (often called the Secretary of State) where you formed your company (the formation state). It serves as official proof that your LLC or corporation was validly formed, still exists, and is in good standing according to the state’s records. The state will also provide a certificate for foreign corporations and LLCs that serves as proof the company is authorized to transact business in the state and is in good standing.
CT Tip: States differ in compliance filing rules and in what they call a Certificate of Good Standing. Depending on the state and other circumstances, it might be called a Certificate of Existence or Certificate of Status.
How businesses lose their good standing status
A corporation or LLC usually loses its good standing status due to various compliance issues such as a lapse in annual report filing or non-payment of franchise taxes. These issues sometimes remain undetected until the worst possible time—like at the closing table for an expansion or financing deal.
Here are examples of how non-compliance can happen, resulting in a company losing its good standing:
Weak internal processes. A company’s responsibility for maintaining good standing is often spread across different departments such as legal, tax and finance. Even businesses with compliance teams often struggle to keep a company in good standing due to outdated or substandard tools and/or processes that don’t continually monitor company information and state requirements.
Ever changing state requirements. States often change deadlines, raise fees, or issue new forms. Businesses may not know about the changes, but they are not exempt from following them. Sometimes notifications are not sent or are directed to the wrong person.
Voluntary status changes. An entity’s status often changes during its business lifecycle. Mergers, acquisitions, expanding into new locations or converting entity types can trigger new compliance requirements. It’s also important to file dissolution or withdrawal forms for every state when closing a business, as the company will remain liable for all required filings, taxes and penalties until that happens.
It’s critical your business remains in good standing. Here are four important reasons why compliance should be a priority in every business.
1. Good standing certificates are often required for financing and business transactions
Lenders sometimes require good-standing status in order to approve new financing. They generally view a loss of good standing status as an increased risk. Other businesses might require a Certificate of Good Standing for certain transactions, requests for proposals (RFPs) or contracts. Or, you may need one to sell the business, for real estate closings, or for mergers, acquisitions, or expansions. If a business can’t provide a Certificate of Good Standing, it raises a compliance “red flag” that indicates something’s wrong with the company’s state status.
2. Staying in good standing can save money
If a business entity doesn’t maintain good standing, the state will likely make an involuntary adverse status change for the company, labeling it, on its public records, as delinquent, void, suspended or dissolved, depending on the state and the nature of the compliance issue. Returning a corporation or LLC to good standing requires the payment of fees, interest, and penalties. And if it has been administratively dissolved or revoked there are additional reinstatement fees.
Continued non-compliance can also cost your company its name. For example, another company may be able to form under the name of an administratively dissolved corporation or LLC. And in order for that corporation or LLC to be reinstated, it will have to pick a new name – which can create a major expense in changing all of the products, marketing materials, etc. that have the old name on it. In other words, the cost of fixing these mistakes can add up. Therefore, keeping your LLC or corporation in good standing helps your business save money.
CT Tip: Choosing the right registered agent can be helpful in keeping up with your LLC or corporate compliance responsibilities.
3. Good standing helps businesses expand into other states
When you form your LLC or corporation, the state considers you to be organizing a business entity. Your business entity (e.g., LLC, corporation) has the right to do business in the state in which you filed your formation documents. If you want to expand your business into other states, you’ll need to register in those states to transact business there. The new state(s) will usually ask for a Certificate of Good Standing from your formation or domestic state before they’ll let you register.
CT Tip: Registering to do business in a new state is called foreign qualification. Foreign usually means another country or nation, but in this context, it simply means a state within the US different than an entity’s formation state.
4. Losing good standing has serious consequences
As we’ve mentioned, losing your good standing can block access to needed financing in order to maintain daily operations, prevent you from doing business in new states, cost your company its name, and force it to pay fees, interest and penalties.
Other consequences of losing your good standing include the following:
- No access to the court system: If your corporation or LLC needs to file a lawsuit and is not in good standing, many states will not allow it to maintain that lawsuit
- Personal liability: States may also fine each employee, officer or director who conducts business on behalf of a company while it’s in revoked status (if they have personal knowledge that the company is not in good standing)
- Vulnerability to business identity thieves: Business identity thieves check state records to see what companies are listed as suspended, delinquent or dissolved. They assume no one is paying attention. They can then use the company’s identity to make loans or purchases that the company will be on the hook for.
- Tax Liens: If your business fails to pay taxes, the state may issue a tax lien, which hurts your chances of securing new financing.
- Revocation or Administrative Dissolution: If you fail to bring your business entity into good standing, your company will likely be dissolved in your formation state and your foreign qualifications revoked. And while most states allow reinstatement there is usually a time limit. If you haven’t reinstated in time your company is out of luck. Obviously, this is a worst-case scenario. If you address compliance problems as soon as you’re aware of them, this is an unlikely outcome.
Learn more
Maintaining good standing requires constant attention, especially when you do business in multiple states. If you want to learn more about how to maintain your good standing, contact a CT Corporation specialist today.