Maintaining good standing helps an LLC or corporation prove that it has met state compliance requirements in its formation state and any state where it does business. This status can affect financing, contracts, expansion, legal rights, and the company’s ability to avoid penalties or administrative dissolution.
What does "good standing” mean?
“Good standing” status is obtained when a statutory business entity (such as an LLC or corporation) has met the compliance requirements for the state in which it was formed or registered.
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) in the company’s 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.
Additionally, loss of good standing can result in fines and penalties, and even the administrative dissolution of a company.
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 can an LLC or corporation lose 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 Even businesses with compliance teams often struggle to keep a company in good standing due to outdated or substandard tools and/or processes that don’t continually monitor company information and state requirements.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.
Once a company loses good standing, the effects can reach financing, state expansion, legal rights, and day-to-day operations. Here are four reasons why maintaining good standing should remain a compliance priority for every LLC or corporation.
1. Good standing certificates are often required for financing and business transactions
Lenders sometimes require confirmation of a company’s 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.