What is a Certificate of Good Standing?
By Mainshares
Oct 26, 2023
In Buying a Business
A Certificate of Existence, often referred to as a Certificate of Good Standing is an official document that serves as a seal of approval for corporations, LLCs, and various other business entities. It certifies that a company is validly existing and fully compliant with state requirements. In essence, it confirms that the entity is in "good standing" with the state.
What can cause a business to lose its good standing status?
Not all businesses are actively in good standing with their domiciled state. Common causes for falling out of good standing include:
Failure to File Annual Reports: Neglecting to submit annual reports in a timely manner can result in a loss of good standing.
Non-payment of Fees and Taxes: Accumulating tax debt or failing to pay annual fees can jeopardize a business's good standing status.
Non-compliance with State Laws: Violations of state regulations or significant legal issues can lead to non-compliance and the loss of good standing.
Why are Certificates of Good Standing needed?
1. Validation of Compliance:
Regulatory Compliance: For Limited Liability Companies (LLCs), a Certificate of Good Standing serves as a testament to compliance with state laws, demonstrating that they have fulfilled annual report filings, tax obligations, and all necessary fees and requirements. Registered agents, serving as liaisons between the business and the state, play a vital role in ensuring compliance. They receive important legal documents and correspondence from the state's office, including annual report notices. This is critical to maintaining a business's good standing in a state like Delaware and avoiding potential compliance issues.
Annual Reports and Franchise Taxes: For corporations and LLCs, regular filing of annual reports is a key part of maintaining good standing. Failure to do so can result in non-compliance. Likewise, paying franchise taxes, which are often required for corporations, is a vital aspect of financial responsibility. Having a Certificate of Good Standing signifies that these obligations have been met.
2. Special Purpose Vehicles (SPVs):
Credibility for SPVs: Special Purpose Vehicles (SPVs) are frequently established for specific financial transactions or investment purposes. Investors want to ensure that these SPVs are properly formed and authorized before they invest through them. A Certificate of Good Standing for the SPV reassures investors that it is a legally recognized and compliant entity, instilling confidence in the transaction's integrity.
3. Business Acquisitions:
Legal Status for Asset Transfer: When businesses engage in transactions, partners, investors, or counterparties often require assurance that the business is legally authorized to do so. In the context of an asset sale, the seller's legal status plays a crucial role. A Certificate of Good Standing is essential for demonstrating that the selling entity, whether a corporation or LLC, is an active, compliant company with the legal capacity to transfer assets and ownership. This provides the buyer with a level of confidence and legal assurance, making the transaction more secure and trustworthy. In addition, banks often require a Certificate of Good Standing from the state's office as proof of the business's legal status before they allow the establishment of a business bank account.
How long does it take to receive a Certificate of Good Standing?
To obtain a Certificate of Good Standing, business owners need to reach out to their state's Secretary of State or relevant business registration office. The process involves applying for the certificate and paying a fee. The time it takes to receive the certificate varies depending on the state, but it typically takes a few business days. Some states offer expedited processing for an additional fee, which can be valuable for businesses needing the certificate quickly.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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