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4 Reasons to Stay in Good Standing for Business Compliance

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 (foreign qualification). 

A Certificate of Good Standing is a document provided by the secretary of state (or other filing office) 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 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 a company can lose 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 Even businesses with compliance teams often struggle to keep a company in good standing due to outdated or substandard tools and/or processes that don’t continually monitor company information and state requirements.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 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 annual report or franchise tax 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.  

CT Tip: The key to being able to get a good standing certificate when needed is keeping your business in compliance. If you’re current on your company’s state fees, filing requirements and taxes, getting this certificate is easy. When a company is behind on compliance—and isn’t in good standing—getting this certificate for a deal, contract, or business loan won’t happen.

2. Staying in Good Standing Can Save Money

If a business doesn’t maintain good standing, the state will likely make an involuntary adverse status change for the company, labeling it as delinquent, void, suspended or dissolved, depending on the state and the nature of the compliance issue. 

CT Tip: Don’t wait to check if your company is in good standing until you need financing. The amount of time and money it takes to fix your company’s status may prevent you from being able to access needed capital.

The most common reasons for losing good standing include a missed annual report, registered agent and/or office problems, or unpaid fees or taxes. The cost of fixing these mistakes can add up. Keeping your LLC or corporation in good standing helps your business:

  • Keep operating costs lower—filing on time avoids extra fees and fines from sapping your budget
  • Prevent a state from administratively dissolving the LLC or corporation (and then having to apply for reinstatement
  • Prevent a state from administratively revoking the authority of the LLC or corporation to do business in a foreign state (and then having to apply for reinstatement). 
  • Maintain the limited liability that an LLC, corporation, or other business entity provides
  • Preserve your rights to your LLC’s or corporation’s legal name in state records
  • Keep your business poised for sudden contract opportunities, bids, or deals with other companies that require a Certificate of Good Standing to pursue or seal the deal.

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. 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

Losing your good standing can block access to needed financing in order to maintain daily operations. If your compliance issues are serious enough, your formation state can dissolve your business.

Other consequences of losing your good standing include:

  • Loss of name: A state may revoke your right to do business under your registered name, allowing another business to register that name in your state
  • No access to the court system: If you need to file a lawsuit and your business is not in good standing, many states will not allow you to maintain that lawsuit
  • Penalties and fines: Once you’ve lost your good standing, the state will impose penalties and fines on the LLC or corporation that must be paid in order to get your standing back
  • Personal liability: States may also fine each employee, officer or director who conduct 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)
  • Tax liens: If your business fails to pay taxes, the state may issue a tax lien, which kills your chances of securing new financing.
  • Revocation or Administrative Dissolution: If you fail to bring your business into good standing, your company will likely be dissolved in your formation state and your foreign qualifications revoked. 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 representative at 844-682-1582 (toll-free U.S.)

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