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Starting a business can be a complicated process, but it doesn’t always have to be. There’s always help out there if you need it. In this piece, you’ll learn all about whether or not your LLC needs a certificate of good standing.
This one document can lend credibility to a new business, but it’s also necessary when a business wants to prove it exists or expand into other states. It’s a fairly common document and also very important for certain actions.
For example, if your company wants to go to a bank and get a line of credit, you’re going to need a certificate of good standing. So how do you know when you need one?
The quick answer is that not all businesses need one. The ones that do, however, will be asked to provide one when it’s necessary. Here are some basics you need to know.
What Is a Certificate of Good Standing, and What Does It Do?
A certificate of good standing (sometimes called a certificate of status) is a state-issued document stating that your company exists and has completed all the necessary actions required to do so. Basically, after certain corporations or LLCs are formed, they need to stay in “good standing.”
This status helps a business:
- Keep its limited liability status
- Expand into other areas, especially states
- Have the ability to get a “good standing” certificate quickly when requested by a vendor
- Avoid certain fees or penalties brought by the state
- Show banks proof that the LLC actually exists when applying for financing
- Show investors that the business is a legitimate one
In plain terms, being in good standing means that an entity has filed all fees and reports with the corresponding state office. It basically shows others that the entity exists and is authorized to conduct business in the state.
It’s generally required when an entity wants to do business in other states. This action is sometimes called a foreign qualification.
Foreign doesn’t necessarily mean another country. In business terms, an entity is domestic in its own state and foreign to other states. For example, an entity in South Dakota is domestic to South Dakota but foreign to Ohio.
What Happens If an Entity Is Not in Good Standing?
There can be various consequences if a business isn’t in compliance with state laws, including penalties or fees.
Most states will give a business plenty of notice of status and ample time to correct any discrepancies. In extreme cases, a failure of compliance might even mean the dissolution of the business and the loss of limited liability protections.
Which Businesses Need a Certificate of Good Standing?
Businesses that are required to register with the state are issued certificates of good standing. If you have a business that isn’t registered with the state, it won’t need a certificate of good standing, and it won’t get one.
Sole proprietorships aren’t required to register and therefore won’t need a certificate of good standing. Limited Liability companies and corporations require registration with the state, as well as limited liability limited partnerships (LLLPs), partnerships, limited liability partnerships (LLPs), and limited partnerships.
When Is a Certificate of Good Standing Needed?
A certificate of good standing is needed when another business requires it. Or when it’s requested by someone you’re doing business with. It’s common for banking institutions to require one before it opens a business bank account.
In other cases, a certificate of good standing is needed when setting up customer payments by debit or credit card. Also, if your LLC or entity wants a line of credit or loan, a certificate of good standing is going to be needed.
Lines of credit mean the business can have a company credit card or checking book.
State-to-state business transactions will need a certificate of good standing, but you may need to register as a foreign entity.
Here’s an example: If your LLC is based in Georgia and you want to do business in other states, you’re going to need to present a certificate of good standing along with all the other required documents.
It’s rare for customers to ask to see certificates of good standing, but that doesn’t mean they won’t ask, along with all the other required professional licenses.
It’s most important to get one when a business starts and then whenever you start a business relationship with another entity.
Certain states will require a certificate of good standing within 30 days of when it’s used. Other states are more lenient, allowing for 90 days. Check local statutes for those times and limits. Some states require certificates to be proven authentic.
Depending on the state certificate of good standing, it can cost anywhere from $5 to $50 and up to $100 for long-form LLCs and LLPs. A good number of states offer the ability to get a certificate online and immediately.
Others, like California or Delaware, can take between 2 and 4 weeks.
The Last Word
So, the bottom line is not all businesses require a certificate of good standing and it’s only necessary when someone else you’re doing business with requests it. If you don’t have one yet and need one, contact your Secretary of State office or read our guide on how to get a certificate of good standing.
Filed under: Advice Columns