Good standing certificates: Overview, definition, and example
What are good standing certificates?
A good standing certificate (also known as a certificate of existence or certificate of authorization) is an official document issued by a state or government agency that confirms a company is properly registered, has complied with all necessary legal requirements, and is authorized to conduct business in that jurisdiction. The certificate typically verifies that the company has filed required annual reports, paid any necessary fees, and is up to date with taxes and other regulatory obligations. It is often required in situations such as opening a business bank account, securing financing, or entering into contracts with other businesses.
For example, a company may request a good standing certificate when it applies for a loan to prove that it is compliant with state regulations and has met all legal requirements to operate.
Why are good standing certificates important?
Good standing certificates are important because they provide assurance to third parties (such as potential investors, lenders, or business partners) that a company is legally authorized to do business and is in compliance with regulatory requirements. The certificate serves as a form of verification of the company's status, helping to build trust and credibility in business transactions. For the company, obtaining a good standing certificate is often a necessary step in ensuring smooth operations, maintaining legal compliance, and facilitating business activities.
Understanding good standing certificates through an example
Let’s say a small business is looking to secure a loan from a bank. As part of the loan application process, the bank requires a good standing certificate to ensure that the company is legally registered, in compliance with tax obligations, and authorized to operate in the state. The business owner requests the certificate from the state’s Secretary of State office, and upon receiving it, submits it to the bank as proof of the company’s compliance and legitimacy.
In another example, a company that is seeking to expand its operations into a new state may need to provide a good standing certificate from its home state to prove it is legally established and compliant before it can register and operate in the new state.
An example of a good standing certificate clause
Here’s how a good standing certificate clause might appear in a business contract or financing agreement:
“The Borrower shall provide the Lender with a current certificate of good standing from the state in which it is incorporated, confirming that the Borrower is authorized to do business and is in compliance with all applicable laws and regulations.”
Conclusion
Good standing certificates play a crucial role in ensuring that a company is legally authorized to conduct business and has met all necessary regulatory and financial obligations. They help build trust with third parties, such as investors, lenders, and business partners, and are often required in business transactions that involve legal, financial, or operational matters. Obtaining and maintaining good standing is essential for businesses to operate smoothly and to demonstrate their credibility in the marketplace.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.