Organization and good standing: Overview, definition and example
What is organization and good standing?
Organization and good standing refer to the legal status of a business entity, confirming that it has been properly formed, is operating in compliance with relevant laws and regulations, and is authorized to conduct business. "Organization" typically means that the entity has been properly created, such as through filing articles of incorporation for a corporation or registering a limited liability company (LLC). "Good standing" means that the entity has fulfilled all necessary legal requirements, such as paying taxes, submitting required filings, and maintaining required licenses or permits. An organization in good standing is one that is legally compliant and active in its operations.
For example, a business that has filed its annual reports, paid required state fees, and renewed its licenses is considered to be in good standing with the relevant authorities.
Why is organization and good standing important?
Organization and good standing are important because they ensure that a business is legally authorized to operate, enter into contracts, and carry out its activities. If a business is not in good standing, it could face penalties, fines, or legal challenges that could hinder its ability to operate. For businesses entering into contracts or transactions, being in good standing is often a requirement, as it indicates that the company is legally compliant and in a position to fulfill its obligations.
In contracts, a clause confirming that the parties are in good standing is often included to provide assurance that each party is legally recognized and capable of fulfilling its contractual commitments.
Understanding organization and good standing through an example
A technology startup is about to enter into a business agreement with a larger company. As part of the due diligence process, the larger company requests confirmation that the startup is in good standing. The startup provides the necessary documentation showing that it has filed all required annual reports, paid its taxes, and is properly registered with the state. This confirmation of good standing assures the larger company that the startup is legally able to enter into the agreement and conduct business.
An example of an organization and good standing clause
Here’s how an organization and good standing clause might appear in a contract:
“Each Party represents and warrants that it is a duly organized and validly existing entity under the laws of its jurisdiction of incorporation or formation, and that it is in good standing with all applicable governmental authorities. The Parties further represent that they have all necessary licenses, approvals, and authorizations required to conduct their business and to enter into and perform this Agreement.”
Conclusion
Organization and good standing are critical concepts for businesses, ensuring that they are legally formed and compliant with necessary regulations. Businesses that are properly organized and in good standing are able to legally engage in contracts, fulfill obligations, and operate without the risk of legal penalties. Clear clauses confirming organization and good standing in contracts help provide assurance that each party is capable of legally fulfilling its commitments under the agreement.
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.