There are many federal, state and local documents that you need to obtain when starting or running your small business. This can make it hard for lenders, investors and clients to know that you have everything you need to conduct business legally in your state. A “Certificate of Good Standing” makes this process easier. When you apply and qualify for one, you’re effectively saying your business is in “good standing” with the state you operate in. Many lenders, investors and government agencies require that you present one before they conduct business with you.
Read on as we go over what a Certificate of Good Standing is, who needs one and how you can get one today.
What Is a Certificate of Good Standing?
A Certificate of Good Standing—sometimes called a “Certification of Facts,” “Certification of Status” or “Certification of Existence”—is a document generally issued by the Secretary of State’s office in which your business is incorporated. It signifies that your business has met all necessary regulatory and compliance standards, and is therefore legally authorized to conduct business within that state.
Unlike Articles of Incorporation and other documents you submit when starting out, you don’t need a Certificate of Good Standing before you begin to do business; it simply confirms that the state recognizes your business has submitted those other documents. Without it, those who need to check your business’s legal status would have to verify each piece of information independently.
Requirements vary by location, but you’ll generally need to be up-to-date with the following:
- State and local fees
- Regulatory and compliance documentation
- Licenses and permits
For LLCs and corporations, this will also mean you’ll have to file annual reports with your state agency to remain in good standing.
The certificate usually has an expiration date that generally coincides with the dates documents, fees and business licenses are due. All businesses that register with their state must file for the certificate. Depending on the structure of your business, you may not need to have this document at all.
Who Needs a Certificate of Good Standing?
Not all businesses need to obtain a Certificate of Good Standing. It can depend on your business structure, home state and whether or not you conduct business across state lines.
The type of entity your business is recognized as affects whether you need to apply. If you run a sole proprietorship, you will not need to obtain a certification. These businesses are not registered or filed with the government, so there’s no need to check whether they’re in “good standing.”
General partnerships are basically looked at as sole proprietorships with two or more owners, so most states recognize and regulate them similarly. Both Limited Partnerships and Limited Liability Partnerships (LLP) can also vary by state. Contact your Secretary of State’s office to make sure you don’t need to apply. In these cases, interested parties will need to do their own due diligence to verify any information you provide them.
Limited Liability Companies (LLC) and corporations are required to obtain a Certificate of Good Standing. These businesses are highly regulated and must file multiple documents with the state, so it’s important for others to know that they’re in good standing. Failure to do so could hurt your chances of receiving funding in the future and affect your business’s ability to grow.
Why You Need a Certificate of Good Standing
At this point, you may be asking why you need to go out of your way to apply and pay for another document if you can conduct business without it?
Well, there are a few different scenarios in which having a Certificate of Good Standing allows you to run your small business successfully. Potential stakeholders in your business need to know that you’re keeping up with everything and legal to work with. It’s important to have a document that makes it easier for them to see that your business is up-to-date and it can influence their decision to work with you.
Applying for a Small Business Loan
At some point, your small business will need funding to finance equipment, purchase inventory or raise the working capital necessary to run operations. Obtaining a loan can involve putting together a lot of financial paperwork for lenders. Most require a Certificate of Good Standing to verify that your business is legal. Failure to have one could complicate the application process and hurt your chances of being approved.
Operating Your Small Business
You’ll also want to have this documentation for running and growing your business. Banks will ask for it when you go to open a business account. Some clients will also need to see the certificate before working with you, especially if there are certain licenses and permits your industry requires to conduct business. Investors—if you are starting up or looking to grow—want to see if you’re in good standing before judging whether investing in your company is worth their financial risk.
Your industry and clients also dictate whether you need to apply. If your industry requires you to have any special licenses or permits to operate, the certificate will be used to receive and renew them. If you own a small business that already works with clients across state lines, r want to expand your territory to increase sales, you’ll need to file as a foreign entity with the new state. This process requires current proof of your status.
(Note: If you’re in a state that does not require a Certificate of Good Standing for foreign entities—Alaska, Kentucky, Minnesota, Pennsylvania and Texas—you’ll still need to obtain one to become a foreign entity in a state that does.)
Business Acquisition or Sale
If you plan on acquiring a business, you’ll need to show that your current enterprise is legal. When selling your business, potential buyers will need to do their due diligence before making an offer. It’s important to make sure everything is in good standing before beginning this process, as it’ll halt negotiations and potentially stop a deal from materializing.
Applying for a Certificate of Good Standing
After you’ve filed and received all of the necessary items you need to be up-to-date, it’s time to fill out an application. Obtaining one is fairly easy and inexpensive.
The office of the Secretary of State usually handles this, with a few exceptions. The application process and fees vary by state—Wyoming and Colorado are free—so make sure to reach out to find out how to obtain yours.
Below are links to where you can find information on applying in your state:
Remember, some states refer to this document differently. As a reminder, you have to apply for one to become a foreign entity in another state even if your home state—AK, KY, MN, PA and TX—doesn’t require one.
Many states offer online applications, but you could also receive yours by mail, email or in person. Generally, completing the process online or through standard mail is your best bet to ensure speed and accuracy.
Now that you have everything you need to know to get your Certificate of Good Standing, you are free to get more clients, expand and receive funding. Speak with one of our business advisors to learn more about how you can take your business to the next level.