Does Your Business Need a Certificate of Good Standing?
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Issued by your state, a Certificate of Good Standing lets others know, a.k.a. lenders, that your business is in fact in good standing within your state. Upon starting a company, there may be several documents, licenses, permits and other such items that you need, and while this one isn't a necessity, in some cases, it does make a lot of sense to apply for one. By getting this certificate, you make it easier and much clearer for others to see that you have done everything required and are up to date in terms of what's needed for conducting business. In this article, we look further into the importance of a Certificate of Good Standing for the American small business.
The Reasoning Behind a Certificate of Good Standing
A Certificate of Good Standing may also be labeled a "Certification of Facts," "Certification of Status" or "Certification of Existence"; usually the secretary of state will issue such a certificate. And it will be issued once it is shown that your company has met all relevant standards and regulations within that state. Ultimately, it means you are good to go as far as operating your business.
While it isn't required like some other documentation to start and set up your business, it does demonstrate that you've done what was needed to be legally identified as a viable business within the state. In other words, you've submitted everything required. Without this certificate of good standing, people would have to verify each piece of information individually, which could pose a problem for some.
To receive your certificate, you will need at a minimum to be up to date as far as your taxes, any applicable state fees, compliance items, and licenses and permits that apply to you. If you're an LLC or corporation, you also need to have filed your annual reports on time.
Do You Need this Certificate?
Not all businesses will need to apply to get this certificate of good standing. That said, however, you should understand state requirements as they relate to your business structure; requirements do differ state to state.
Sole proprietors do not require this certificate. They're not registered with the state government and thus no such documentation is needed for them to conduct business. Most states will also not require a general partnership to have one. If though you're an LLC or corporation, you most likely will be required to have a certificate of good standing on file with your state of incorporation. Particularly if looking to get funding from a lender, they are usually going to want to see this certificate included with your application packet.
Can you run your company without one…Generally yes. However, there are a few key reasons why having this certificate does make sense. For one, you're showing your shareholders that everything is in order, up to date and filed accordingly. Secondly, and perhaps most crucially for some, it allows a lender to verify that your business is indeed legal and has submitted and recorded all relevant documentation to that end.
Small Business Loans & A Certificate of Good Standing
If you have not gotten a certificate of good standing and consequently go to apply for business financing, you could hit a roadblock before you even really get started. Whether you're looking for money for an expansion project, equipment financing, staffing or marketing, the lending institution is going to want to know that you comply with all applicable state regulations and standards. If you have this certificate, that shows them all they need to know in that respect. If you do not have one, this could hinder your chances of any sort of approval.
Operating a Small Business
Even from a day to day perspective, having a certificate of good standing has its benefits. For instance, some clients will need to see it before agreeing to work with your company. Investors also, concerned about businesses who may not be up to date as far as licenses and permits, will probably ask to see such a certificate before investing any money in your company. Also, banks will generally ask to see it before you can open an account with them.
Your industry may dictate whether or not you really should have one. If for example there are permits required for you to be operating legally within the state, the certificate of good standing can be used to receive and renew these. Additionally, if looking to engage with clients in other states, you will probably need to show proof of your current standing first.
Business Acquisition or Sale
For those hoping to acquire a new business, you have to be able to demonstrate that everything about your company is legal and on the up and up. Same goes when selling your company. Any potential buyer will look into any and every aspect of the company—having that certificate is another level of reassurance and a way to keep the process rolling along smoothly without any hitches.
Getting Your Certificate of Good Standing
The application process, fortunately, is not all that complicated. You will fill out the forms obtained via your secretary of state's office. Keep in mind, that from state to state what this document is called exactly can change. So understand going in what specifically you need to be asking for. There are a few states who do not require certain certificates. A quick google search will determine what your state does require.
Most states will have an online version of this application. You can also opt to do it the old fashioned way and mail it in. Online though is faster and generally seems to be more accurate. And that's it. You'll receive your certificate of good standing, and as noted, you can use this in certain circumstances to renew other applicable licenses, etc…It does make sense to take the time and get yours.