It’s that time of year again, and I’m not talking about the joyous arrival of gifts, cookies, presents, and family. Nope, it’s the mundane that drives this information sleigh, annual entity reporting. Whether you like it or not, it needs to be done and it needs to be done timely. But what happens if it’s not done timely, or it’s otherwise improper? Well, state governments will soon be checking their lists (twice) and those that fail to report may end up with the business-status equivalent to a lump of coal, losing “good standing.”
What is Good Standing?
Legal entities (such as corporations, LLCs, LLPs, etc.) must undertake certain procedures in order to conduct business within a state’s borders. These procedures vary state by state, not only as to the creation of these entities but also for ongoing requirements that keep a company in good standing. Therefore, companies that operate in multiple states must navigate each state’s particular procedures to ensure that they stay in good standing in each state in which they do business.
Failing to follow proper procedures (i.e. file annual reports) puts a company’s status into “bad standing.” Each state has individual terms and lingo to indicate “bad standing.” For example, in Wisconsin a company can be “delinquent” or “in bad standing;” whereas in Illinois, a company will typically fall under a “not good standing” status. Although there are more detrimental statuses (i.e. dissolved, suspended, and canceled), bad standing carries potential pitfalls and consequences that companies must be aware of, especially when operating across state borders.
What are the Consequences of Bad Standing?
For an owner of a business, a history of good standing will assist in pursuits for investors, mergers, lenders, and other potential partners because it can be an indicator of the company’s financial and managerial strength. For example, repeated delinquencies may indicate that a company lacks the management skills necessary to meet simple deadlines. While the occasional “bad standing” status will not typically prevent lenders or partners from working with your business, habitual offenders may suffer a different experience. Furthermore, any lender, investor, or potential partner (that you actually want to partner with) will check this status and require that you are in good standing prior to finalizing agreement.
The dangers of bad standing are not always apparent, as they can derive from obscure laws or unforeseen litigation. Hazards also vary depending on the particular state where the bad standing occurs, and could include:
Loss of Capacity to Sue In some states, a company that is not in good standing does not have the right to file claims in the courts until restored to good standing. This does not mean that a company cannot be sued by others asserting claims against the company.
Individual Liability Under some circumstances, individuals can be held personally liable for conducting business on behalf of a company that is not in good standing, and the ramifications to an individual charged with such liability (such as an officer, director, or employee) could be devastating.
Business Losses/Costs Loss of good standing could impact business negotiations or contractual deadlines, resulting in breaches, harm to reputation, walk-aways, and/or additional drafting and extension costs, just to name a few.
Difficulty Obtaining Financing Lenders often view companies having bad standing as riskier endeavors, and may refuse financing based upon perceived weaknesses within the business or its management. The more times a company bounces between good and bad standing, the larger the risk appears.
State Imposed Penalties Many states impose fines and/or penalties for failing to stay in good standing, which can quickly compound and impose unnecessary financial and administrative burdens.
Loss of Business Name In some states, a company may lose the right to use its desired name as other companies may be able to acquire the rights while the company is not in good standing.
Dissolution In situations where a business habitually goes into bad standing, the state may administratively or involuntarily dissolve the company and abrogate its legal status.
How to Monitor Good Standing?
A change in status is not always the fault of a company, as there can be changes in requirements (i.e. new fees, forms, or deadlines) that the state does not properly communicate to companies. Sometimes, it is the company’s fault. Whatever the reason, if your company’s status changes to bad standing, you should act as quickly as possible to restore it to good standing. In order to stay on top of status changes and procedures, especially companies operating in multiple states, employ calendar reminders, third party servicers, or any other mechanisms useful for ensuring timely and proper filing of state requirements. For a quick status check, visit the website of the relevant state departments where business operates. In many states, including Illinois, that department is the Secretary of State. In Wisconsin, it’s the Department of Financial Institutions.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
If you need assistance with a related matter, contact us.