A Corporation, Limited Liability Company, or other business that’s registered with the state must comply with all rules and regulations pertaining to how it operates to be considered in good standing.
A business that doesn’t remain in compliance can lose its good standing status, exposing it to serious consequences, including fines and the inability to secure financing or file a lawsuit. In worst case scenarios, a business could be administratively dissolved by the date—effectively shutting it down.
Why Should a Business Care about Good Standing?
A company that’s in good standing with the state can operate normally, without interference or obstacles from regulators. A huge advantage of remaining in compliance is uninterrupted limited liability protection, which protects owners from potential loss of their personal assets.
A business that’s in good standing can operate under its chosen name and take advantage of benefits such as the ability to expand into other states, renew permits or licenses, buy business insurance, seek financing, and transfer ownership of the business.
What a business must do to remain in good standing varies from state to state, but most states require businesses to file required reports, pay fees, maintain a registered agent, file taxes, renew business licenses and permits, and keep personal and business finances separate. You can read more about those requirements in CorpNet’s article, “How to Keep Your LLC or Corporation in Good Standing.”
When a business falls out of good standing for failing to comply with rules the state can step in, possibly taking action that disrupts business operations, jeopardizes the reputation of the company, and causes other problems that can be harmful to the business.
Possible Consequences of Loss of Good Standing
Taking all the steps necessary to remain in compliance with the state can be cumbersome, but not doing so can result in severe consequences. Consider what could happen if your business loses its status of good standing.
- Fines and penalties – States can issue fines and penalties on businesses that have not complied with their regulations and fallen out of good standing. The amounts of fines may increase if they’re ignored or not paid on time.
- Loss of limited liability protection – A company that’s not in good standing risks losing its limited liability protection and putting owners at risk. In certain situations, a court might decide to pierce the corporate veil, which is the layer of protection separating business assets from the personal assets of owners. If the veil is pierced, limited liability is eliminated and officers, members, and directors of the company can be held personally liable. A court generally rules in favor of piercing the corporate veil for serious noncompliance issues, such as co-mingling of business and personal funds and assets, borrowing money while knowing it cannot be repaid, or participating in criminal activity.
- Risk of business identity theft – Criminals increasingly take advantage of companies that have fallen out of good standing. Sensing vulnerability, they use the opportunity to steal business identity for the purposes of borrowing money, getting access to bank accounts, or making purchases under the company’s name.
- Difficulty getting financing – A business that’s not in good standing with the state is likely to have difficulty obtaining a loan or getting financing from a bank because it’s considered to be high risk.
- Loss of its business name – If a company is not in good standing, its right to its business name may lapse. If another company claims the name before the non-compliant business can retain good standing, it could lose its right to use it.
- Loss of access to the court – An LLC or Corporation that’s not in good standing may not be able to file a lawsuit until the standing has been restored. That could prevent it from filing a suit to claim compensation that’s owed to it, sue someone for breach of contract, or taking other legal action.
- Tax liens – A business that’s lost its good standing for not paying taxes may be subject to tax liens from the IRS or a state or local taxing authority. The lien acts as a legal claim against assets of the business, putting bank accounts, real estate, intellectual property, and physical property at risk. In the case of an entrepreneur who runs a business that’s not registered with the state, personal assets could be at risk. A record of a tax lien also can negatively affect a company’s business credit score, making it difficult to take out loans or secure credit.
- Administrative dissolution of the business – As noted previously, a state can remove the rights of a business to conduct business and force it to shut down. Even if the business is able to work with the state to eventually reopen, the dissolution can result in loss of customer confidence, a tarnished reputation, hefty legal fees, and other negative consequences.
Staying in Good Standing
Keeping your business in compliance so it remains in good standing with the state is one of the most important tasks of running a company. Unfortunately, regulations and rules can be cumbersome, and it’s not unusual for them to be overlooked or forgotten.
As you’ve read, however, the consequences of failing to remain in good standing can be devastating to a business. Because requirements for good standing vary from state to state, you’ll need to make sure you know what rules apply to your business and make sure you adhere to them.
If you worry about forgetting to file an annual report, failing to get your taxes paid on time, or taking or neglecting another action that could cause your company to lose its good standing status, you might benefit from help from an individual or company that can make sure your business is always in compliance. Loss of good standing can be extremely disruptive, resulting in unnecessary expense and distracting you from the important tasks of operating your business.
