By Jennifer Friedman
Four Things Every Business Should Know About Good Standing
Starting a business is no small feat. Expenses, logistics, employees and good service are only some of the challenges entrepreneurs face each day. However, keeping a business in “good standing” should be on the priority list of every business owner who incorporated or formed an LLC. Small business owners may believe that many corporate and LLC requirements do not apply to them. But this is a misconception. Failing to follow state requirements may mean that an entity is no longer in good standing and can delay (or even prevent) a business from obtaining financing or expanding into a new state. Failing to stay in good standing can also result in the administrative dissolution of the entity, exposing the owners to personal liability.
While business compliance may seem like a complicated process, understanding the basics of good standing doesn’t have to be a challenge. Here are four things to keep in mind:
Good standing is crucial to establishing credibility.
When business owners choose to form a corporation, LLC or LP, they must file the proper formation papers with their home state, stating the ownership and structure of the entity and appointing a registered agent.
Once the paper work filing is complete, a business will receive an official document from the state (e.g., Articles of Incorporation) indicating that organization’s right to conduct business as a legal entity and can enjoy the advantages this status brings. To maintain this right, the business must follow multiple business laws and requirements, including maintaining a registered agent, making timely filings of required forms, and paying fees and/or franchise taxes.
A Certificate of Good Standing serves as proof that the entity exists and is authorized to transact business in the state and significantly helps a business both in establishing and sustaining credibility long term. For example, when expanding to additional states outside of the business’ home state, a Certificate of Good Standing is required to obtain a certificate of authority to do business in other states.
Avoid falling out of good standing or face serious consequences.
Failure to maintain good standing can lead to detrimental consequences for a small business. Those that do not stay up to date with compliance obligations can lose their authority to operate within a state. Depending on the state, the business will be labeled as “delinquent,” “void,” “suspended,” or “dissolved,” based on the regulations that were not met.
As a result of losing good standing, there are multiple serious consequences for the business, such as:
- Difficulty securing any type of capital or financing as many lenders view a loss of good standing as an increased risk
- Losing rights to the company’s name, opening the door for other businesses to jump in and acquire those rights
- Payment of state-imposed cash fines and penalties, as cash-strapped governments have steadily increased fines and penalties
- Facing tax liens due to non-payment of taxes which can result in the forced sale of property or the inability to transfer ownership
- Termination in the company’s home state or revocation by foreign states
- Inability to file a lawsuit to enforce contracts or obtain damages
States can also hold individuals personally accountable and can impose severe penalties on an officer, director or employee who knowingly acted on behalf of the non-compliant company.
Common ways to fall out of good standing.
A business loses good standing by failing to file its annual report or franchise tax obligations. An entity’s status can change several times throughout its lifecycle following mergers, acquisitions, or opening new locations, all of which can lead to requirements of filing a new annual report or franchise taxes.
Additionally, states change rules often alter deadlines, raise fees or issue new forms, so business owners must keep a pulse on all of these variables in order to maintain good standing. While for many small businesses, compliance issues are not always necessarily top of mind, relying on old processes and documents can often lead to bigger headaches down the road.
Make good standing a priority early on.
Unfortunately, whatever the reason may be for failing to follow compliance laws, the state will only recognize a business that is in good standing; therefore, it is important to take the topic seriously.
Business owners can stay in good standing by proactively staying abreast of regulation changes and deadlines by working with their compliance lawyers, accountants and registered agents. In addition, they can utilize multiple online tools that are both simple and easily accessible to manage the ins and outs of compliance regulations.
In short, making good standing a priority from the outset, and thoroughly understanding the ways in which to keep your business in good standing, is crucial for establishing credibility and maintaining sustainable long-term success.
About the Author
Jennifer Friedman oversees marketing activities for Small Business segment of CT, a Wolters Kluwer Company providing legal compliance solutions to the small-business community. As the CMO of CT Small Business, Jennifer directs all activities related to digital marketing and advertising to help build the brand through innovation, partnerships and enhancing the customer experience. Visit https://ct.wolterskluwer.com/ for more information.