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The importance of maintaining a company in good standing

1 October 2020

What is ‘good standing’?

A company is generally deemed in good standing by satisfying all obligations related to its registration in a public company registry. These may include but are not limited to:

  • Filing annual reports on time
  • Paying franchise or other taxes on time
  • Staying up to date and paying state fees

How does a company lose ‘good standing’?

A business can lose its good standing for several reasons, including:

  • Failure to timely pay a registration renewal fee
  • Failure to file a required periodic document such as annual report or renewal form
  • Failure to pay various taxes or fees
  • Mistakes made in a filed form, such as not signing the form or not correctly completing it.
  • Loss of licenses including business or occupational
  • Criminal activity, including fraud committed by the business or business owners.
Fortunately, losing a company’s good standing can usually be reversed. Once the issues have been rectified such as paying of a fee or correctly submitting documents, a certificate of good standing can be obtained to witness the good standing.

What are the consequences if a company is no longer in good standing?

If a company does not maintain good standing the state will likely make an involuntary adverse status change for the company labelling it, on public records, delinquent, void, suspended or inactive, depending on the nature of the compliance issue.

The company registries may reject the processing of any request as long as the good standing is not restored, including the issuance of certificates or the modification of the particulars of the registration, which may lead to further indirect consequences.

Ultimately, some registrars will order the compulsory strike off of the company, leading to dire legal consequences including the risk of losing the registered name and the forfeiting of the company’s assets. Other registrars will never order a compulsory strike off leading to the company (and its controllers) continuously accruing tax or other liabilities ad vitam eternam and like a sword of Damocles.

Some states may provide generous opportunities for correction before adverse status change.

Why is maintaining a company in ‘good standing’ important?

Failing to maintain a situation of good standing is justly regarded a serious negligence on the part of the company’s directors or controllers.

In some cases, good standing will be used as a criterion to prevent fraudulent applications for important documents and therefore operating a company that is not in good standing will prompt suspicion of fraud.

In almost every case, restoring good standing is costly and time consuming, and may include paying fines and penalties.

Being barred from obtaining a certificate of good standing can make it impossible for you to open a bank account or lead to a freeze of the company’s accounts as well as prohibit you from registering in any other jurisdiction as a foreign incorporation. In general, you will be unable to perform any act which performance supposes that you provide evidence of the company’s good standing in the company’s home jurisdiction.

It is not only important to avoid these implications but to prepare your business for the future. Business is ever changing, and future changes may require financing, selling your business, mergers, and acquisitions or even expansions. You may need to prove good standing at a short notice and delays linked to the poor attendance of your obligations will simply make you lose valuable time-limited opportunities.

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