Compliance, Incorporation, Start Ups

What Is a Certificate of Good Standing and When Do You Need One?

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If you’re a business owner seeking investment capital, pursuing financing, expanding into other jurisdictions, or otherwise developing important business relationships, you may be asked to produce a Certificate of Good Standing. While you don’t necessarily need this certificate to conduct business in the state where you’re registered, there are times when you need to prove to another business or state agency that your business is up to date with all required filings and fees. Let’s discuss what this certificate is, what it means, and when you need to obtain it.

What is a Certificate of Good Standing?

A Certificate of Good Standing (sometimes also known as a Certificate of Existence or Certificate of Authority) is a document issued by a state government. It confirms your corporation or Limited Liability Company (LLC) exists legally, is properly registered, and is compliant with all state requirements and regulations. This includes filing annual reports and paying necessary fees and taxes. It’s proof that you’re running a legitimate operation that abides by the rules, which can be an essential factor in establishing trust with potential partners or investors.

Only businesses required to register with the state can obtain a Certificate of Good Standing–namely, LLCs and corporations. (Sole proprietorships don’t register and therefore don’t need one.) Certificates are also typicallyc useful only for a specified period of time; third parties like banks and state agencies often require one issued within the recent past.

When Do You Need a Certificate of Good Standing?

A Certificate of Good Standing is generally not required to conduct business within the state where you’ve registered your company–your existing registration or business or occupational license gives you that authorization. Typically, you only need to produce this certificate when someone asks you for it. Some examples of when this might happen include:

  • When you’re procuring financing. Banks often require a Certificate of Good Standing during the loan application process. So do potential investors. It reassures lenders and investors that your business is legitimate and in compliance with state laws so they can fund you with a greater level of confidence.
  • When selling the company. If you plan to sell your business, potential buyers will likely want to see your Certificate of Good Standing as part of the diligence process. It helps establish trust and shows that the business is in order before they buy.
  • When forming partnerships with other companies. When entering into a partnership or joint venture with another company, that company may request a Certificate of Good Standing as proof of your business’s legitimacy and good standing in your home state.
  • When you’re expanding operations. If you’re planning to expand your business operations to another state, you’ll likely need to provide a Certificate of Good Standing from your home state. This is part of the process to register or qualify to do business in the new state.

How General Counsel Can Help You

You can obviously apply for a Certificate of Good Standing on your own by submitting an application to the state where your company is registered. However, it’s best that you have an attorney assist you with this process. Here’s why:

  • Reduced risk of rejection. If you’re not actually compliant with state requirements at the time you apply for the certificate, the application may be rejected, resulting in lost time and application fees. Your GC can streamline this process by helping ensure your compliance before you send in the application.
  • Reduced risk of other legal complications. If your application is rejected due to non-compliance, it could potentially open your company up to additional liability, inquiries from the third party who requested the certificate, or additional inquiries from the issuing state. Your attorney can help you avoid these complications by assisting with compliance issues upfront so your application is approved without an issue.

If you need a Certificate of Good Standing for your company, we are here to help. Hood Venture Counsel focuses on entrepreneurs, startups, and small businesses in need of reliable and cost-effective general counsel services. Contact us here to schedule a consultation.

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