What is "good standing" - and why can it affect your right to do business in the US?

The American concept of operating in good standing doesn't just affect your rights; it can result in fines, loss of access to the court system, even the loss of rights to your own business name.

Our expert looks at how you can manage your entity status.

When a business owner chooses to form a corporation, LLC or LP, in the eyes of the state it is “organising” a business entity.

Once a business has been granted the right to do business in the state where it was organised, it can then secure the right to do business in other states by “qualifying” and obtaining a certificate of authority. This usually entails appointing a registered agent, filing required forms and paying fees to every state it wants to do business in.

The duly-recognised business entity must then comply with ongoing states’ rules for reporting income, directors and officers and the like, and paying taxes. Companies that comply with these requirements will have their entity designated as being in “good standing” on those states’ records. Entities that do not comply will have their entity status deemed delinquent, void, suspended, or dissolved. The actual designation depends upon the state, which requirement the entity has failed to comply with and how long it has been out of compliance.

Changes in entity status: the good, the bad, and the ugly facts

An entity’s status can change several times during its business lifecycle. There are two categories of entity status changes: voluntary and adverse. Voluntary status changes are those that are driven by the business itself, such as expanding into new locations, leaving old ones, dissolving the business, or merging with or acquiring other businesses.

Adverse status changes are involuntary. They result from being out of compliance with state laws or requirements. All states designate different levels for adverse status. For example, Delaware, considered a business-friendly state, has several levels of entity status which allow ample opportunity for correction. Other states are stricter; for example, in Nebraska, a company’s status is either “good” or “void.” If a company doesn’t file its biennial report by the due date, its right to do business there is automatically revoked on the very next day.

Adverse status changes can damage your ability to do business

Any entity status other than “good standing” indicates a compliance problem. Usually, problems are discovered at the worst possible time - when a business is in the middle of an expansion, a merger or an acquisition. The consequences of not being in good standing are serious, and there is a lot at stake.

  • Possible loss of access to courts: In many states, if a company loses its good-standing status, it may not bring a lawsuit in that state until good standing is restored.
  • Difficulties in securing capital and financing:  Most financing companies view a loss of good standing as an increased risk, and many lenders will not approve new financing to a company that is not in good standing.
  • Tax Liens: Adverse entity status due to non-payment of taxes can result in a tax lien. Lenders are extremely wary of tax liens since they take priority over other liens.
  • Loss of name rights: Once an entity loses its good standing status, it risks losing the right to use its name in the state. Other companies may be able to acquire the rights to its name while a company is side lined due to loss of good standing. 
  • Fines and penalties: States impose fines and penalties on companies that don’t comply with the requirements that led to the loss of good standing. These can really add up, as cash-strapped governments have been steadily increasing their fines and penalties in recent years.
  • Personal liability: In addition to fines and penalties levied on a company not in “good standing,” some states also hold individuals personally liable for conducting business on behalf of a company while it has a “revoked” status. These penalties can be stiff, ranging from $500 to $5,000 for each officer, director or employee who knowingly acted on behalf of the non-complying company.

Engaging a full-service registered agent could help

At the time a business is formed or qualified, all states require every company to name a registered agent, which serves as the recipient of legal, tax and other official notifications from the state. Some registered agents offer the most basic service of simply forwarding these legal and official notices on to the business; in contrast, full-service agents also provide a complete range of business compliance services.

A full-service registered agent is uniquely positioned to be your compliance partner. It is acquainted with the types of entities you formed, the types of businesses you are in, and the jurisdictions in which your entities operate. A full-service registered agent also has the expertise, resources and relationships with the state governments to help you stay ahead of your compliance needs.

The full-service registered agent will also:

  • Provide tools and services that automate entity monitoring and notify you about any status changes to your entities
  • Track developments in state laws and requirements, and automatically 
  • Alert you when there are changes in the law that impact your business
  • Provide follow up communications to advise you of new compliance procedures.
 
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