What is a certificate of good standing?

A Certificate of Good Standing is a document issued by the government that certifies that a business has filed all reports and paid the necessary fees with the Secretary of State’s office.

By Brad Nakase, Attorney

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What is a Certificate of Good Standing?

Has your company ever been requested to furnish a “Certificate of Good Standing”? This document, issued by the state, is crucial to have readily available when needed. However, obtaining it entails ensuring that your entity remains compliant with filings with the state and other stipulations.

Following the formation of a limited liability company (LLC), corporation, or any other entity, it is imperative to uphold its status of “good standing” in state records. This diligence serves several important purposes:

  1. Safeguarding the limited liability protection offered by the entity.
  2. Facilitating expansion into different states.
  3. Expediently obtaining a certificate of good standing for lenders.
  4. Preventing incurring state-imposed penalties or fees.

Lenders might stipulate the need for a Certificate of Good Standing as a prerequisite for financing approval. Keeping good standing is key in avoiding potential delays arising from having to renew your status with a government agency in the midst of a loan or deal process.

In broad terms, a Certificate of Good Standing essentially attests that the entity has submitted all required reports and settled the relevant fees with the Secretary of State’s office. It functions as confirmation, demonstrating that the entity is in existence and possesses the authorization to conduct business within the state.

It is worth noting that the specifics of business entity regulations can differ from one state to another. Consequently, the document furnished by the state may go by various names such as a “Certificate of Existence, a “Certificate of Good Standing,” “Certificate of Authorization,” or something akin. Please contact our California business attorney to help you get a Certificate of Good Standing.

What leads to a business losing its good standing?

The underlying idea of a certificate of good standing is relatively straightforward. Nevertheless, any lapse in maintaining good standing serves as a compliance warning that requires prompt action.

Typical factors contributing to an entity’s loss of status of “good standing” encompass:

  1. Neglecting to submit annual reports in a timely manner.
  2. Failing to properly oversee a registered office or registered agent.
  3. Not promptly remitting franchise taxes.

A prerequisite for conducting business in different states

To register for business operations in different states, a Certificate of Good Standing is often mandated. The act of registering to conduct business in a state different than the one where the entity was originally formed is typically referred to as foreign qualification.

What is “foreign”?

While “foreign” traditionally denotes another country, in this context, it simply signifies another state. An entity is considered “domestic” in the state where it was formed and “foreign” in all other states.

For instance, a company that was incorporated in Virginia is considered a domestic corporation in Virginia and a foreign company in any other state.

In many cases, states require a company to furnish a Certificate of Good Standing from its formation state before granting authorization to conduct business within their jurisdiction.

Certificate of Authorization

A foreign company’s “Certificate of Authorization” serves a similar purpose to a domestic corporation’s “Certificate of Good Standing”. This document typically affirms that a foreign corporation (i.e., one formed in a different state) is permitted to engage in business activities within the state.

For instance, a company incorporated in Illinois would generally obtain a “Certificate of Good Standing” from Illinois and a “Certificate of Authorization” from any different (foreign) states where it intends to operate.

The repercussions of not being in good standing

When your business falls short of meeting state requirements or laws, it typically leads to an unfavorable change in status with the state.

While some states offer ample opportunities for rectification before implementing such a change, others may not be as lenient.

A state might levy penalties or fines on businesses that fail to be in compliance and forfeit their good standing.

A lapse in compliance could even lead to the entity’s administrative dissolution, resulting in the forfeiture of limited liability protections for the involved individuals.

Regularly checking your entity’s status with the state, ideally on a monthly basis, is crucial. According to the nature of your business structure, manually doing this may be burdensome and time-consuming, but the effort is well justified.

Entity management software can be a valuable tool for keeping track of good standing status. Additionally, a full-service registered agent can offer expert assistance in keeping a close eye on your entity’s status and promptly letting you know of any changes.

In summary

Numerous small business proprietors opt to entrust their entity compliance to specialized firms known for their efficient and cost-effective services. (Ongoing compliance management can be offered separately, but is bundled with registered agent services.) Engaging our business attorney allows you to focus on the core operations of your business.

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