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 documents in the states 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?
Good standing is when a corporation or LLC complies with its statutory obligations. Being in good standing on the state’s records means that the business 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. The penalties can be particularly severe if the non-compliance continues to the point that the LLC or corporation is administratively dissolved or revoked.
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.
Difficulties in securing capital and financing.
You may be asked to provide a Certificate of Good Standing as part of a financial transaction. 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.
Possible loss of access to the courts
Losing access to the court system 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. This is particularly a risk if the non-compliance with the statutory obligation has resulted in the LLC or corporation being administratively dissolved or revoked by the state.
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 these take priority over other liens.
Loss of name rights.
An entity that loses its good standing status, in particular if it has been administratively dissolved, risks losing its name. Other companies may be able to acquire the rights to their name while a company is sidelined due to its revoked status.
Personal liability.
Some states also hold individuals personally liable for conducting business on behalf of a company that has lost its right to conduct business due to its non-compliance. These penalties can be severe and levied on each officer, director, or employee who knowingly acted on behalf of the company during the period in which it was not authorized to conduct business.
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 assume the company’s identity to buy goods, borrow money, or take other harmful actions. They will also reinstate companies that have been administratively dissolved without the real owners knowing about it.
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 from one entity type to another. It’s also important to note that when closing a business, the corporation or LLC remains liable for all required filings, taxes, and penalties until it has it has been formally dissolved, or if it will continue to exist but is closing shop in a state in which it has registered as a foreign LLC or corporation, until it has formally withdrawn.
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 have compliance obligations beyond those imposed by the state LLC or corporation law, 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.
Stay compliant and protect your good standing status
Regardless of how the compliance failure happened, in the eyes of the state, a corporation or LLC has either met all its compliance obligations and is in good standing, or it hasn’t.
Take a proactive compliance stance to keep your corporation or LLC healthy and on track. Businesses have many options today, ranging from online tools that support a do-it-yourself approach, to partnering with an expert full-service registered agent to create customized best practices.
Evaluate the complexity of your compliance situation. Businesses with simple entity structures may consider interactive, collaborative compliance calendars offered by service providers that specialize in corporate compliance. Businesses with many entities doing business in multiple states have exponentially more complex compliance needs. Consulting with specialized service providers can head off status problems before they occur, and empower compliance professionals to proactively manage the risks.
Learn more
Managing annual report requirements requires constant attention, especially if you have multiple entities across jurisdictions.
Contact a CT Corporation representative to learn more about how to efficiently keep all your entities in good standing.
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