When forming a corporation or Limited Liability Company (LLC), prospective business owners must file the proper formation document in their home state or country, and the proper registration documents in all the states they wish to do business with. The company is expected to comply with all local and state laws, regulations, and requirements. In return, the states grant the right to conduct business as a statutory business entity.
A company is in “good standing” on the state’s records when it has met all the necessary legal obligations, such as filing required documents, paying fees and taxes, maintaining a registered agent, and adhering to corporate compliance requirements.
The Significance of Good Standing
Fulfillment of Legal Requirements: The company meets all statutory obligations, including timely filing of annual reports, payment of taxes and fees, and maintenance of registered agents.
Protection of Limited Liability: Maintaining good standing is crucial for preserving the limited liability protection afforded to shareholders or members. Without it, individuals associated with the corporation may be personally liable for its debts and liabilities.
Enhanced Credibility and Reputation: Good standing enhances a corporation's credibility and reputation in the eyes of stakeholders, including customers, suppliers, investors, and regulatory authorities. It signifies a commitment to ethical business practices and regulatory compliance.
Access to Business Opportunities: Corporations in good standing are better positioned to pursue business opportunities, secure financing, enter contracts, and engage in transactions with other entities.
Access to Legal Remedies: Companies in good standing are entitled tolegal remedies and protections provided by the state or jurisdiction.
However, companies that don’t stay on top of their compliance obligations can lose their good standing status. The company will instead be considered “delinquent,” “void,” “suspended” or “dissolved.” Loss of good standing can damage its ability to do business.
What causes the loss of good standing?
Failure to file annual reports or pay franchise taxes.
Voluntary status changes, such as mergers or expansions, trigger new compliance requirements. Companies can fall into the trap of changing their status without looking into their new compliance requirements, resulting in the loss of good standing.
Changes in state requirements that companies may overlook or fail to address. Notifications may not be sent or directed to the wrong person, or the importance of the communication is overlooked.
Weak internal processes for monitoring compliance and staying updated on legal obligations.
Consequences of Loss of Good Standing
Failing to maintain compliance and good standing can have severe repercussions for a company:
Legal Liabilities: Non-compliance may result in legal actions, fines, penalties, and sanctions imposed by regulatory authorities.
Financial Losses: Compliance failures can result in financial losses due to fines, legal fees, settlements, and revenue disruptions.
Loss of Trust: Violations of laws or regulations tarnish the corporation's reputation and erode trust among stakeholders, leading to diminished market confidence and potential loss of customers or investors.
Risk of Dissolution or Suspension: Persistent non-compliance and failure to rectify deficiencies may lead to the suspension or dissolution of the company by regulatory authorities, effectively shutting down the company’s operations.
Personal Liability Exposure: In cases where corporate formalities are not followed or legal requirements are neglected, shareholders or members risk losing their limited liability protection, exposing their personal assets to corporate liabilities.
Business Identity Theft: Companies not in good standing may be targets for identity theft, leading to fraudulent activities that can harm the company's reputation and finances.
Maintaining good standing is essential for responsible business conduct. By prioritizing compliance, corporations safeguard their reputation, mitigate risks, and build trust with stakeholders.
For assistance with compliance concerns, case specific questions, or help making sure your company meets all compliance requirements,contact a trusted professional at Chugh, LLP.
