Certificate of Good Standing: Definition, Importance and Eligibility
The certificate of good standing is of immense value as it creates goodwill for the entity among investors as well as customers. Banks and other financial institutions tend to provide loans on flexible terms to entities that have a good standing certificate.
Read on to know how you can get a certificate of good standing!
What Is a Certificate of Good Standing?
A good standing certificate issued by a government agency signifies that a company is in compliance with the law of the land. It has completed the registration or incorporation procedure; there are no taxes due from the company, and it has completed all the legal formalities.
These certificates come with an expiry period and must be renewed from time to time as mandated by the government. The private limited companies, corporations and LLPs need a certificate of good standing. However, general partnership companies or sole proprietorships do not require these certificates.
Basically, these certificates show that the company is legitimate. Different state or local governments have different rules and fees for granting a good standing certificate. The application process for a good standing certificate and receipt of the same also differs.
How Important Is a Certificate of Good Standing?
Here are some reasons why getting a certificate of good standing is important:
- This certificate shows that your business enterprise is a legal entity carrying out all its activities within the framework of the law.
- Many banks and other financial institutions may require a good standing certificate for opening an account with them.
- Having this certificate will allow financial institutions to provide investment services like buying or selling financial securities. Brokerage houses may not allow companies not having good standing certificates to use their platform.
- Various lending institutions consider this certificate as proof of creditworthiness. This allows companies to borrow funds at favourable repayment terms.
- These certificates protect the personal assets of owners or majority shareholders of a company. A good standing certificate enforces the limited liability rule that investors are liable up to the amount invested by them.
- Owning this certificate helps entities attract domestic and international investors.
Who Is Eligible for a Good Standing Certificate?
The following organisations are eligible for getting a good standing certificate:
- Public limited companies
- Private limited companies
- Limited liability partnerships or LLPs
- Limited liability companies
- Non-profit organisations
Now, let's see when a company need these certificates. Here are some situations which may require these certificates:
- When the company is applying for a loan or line of credit from any lending institution.
- If the company is selling or transferring the business to another individual or organisation.
- When a company is looking to expand its operations outside a state or the country.
- When the company is approaching any institutional or portfolio investors for investment.
What Are the Requirements for a Certificate of Good Standing?
A company may apply for a good standing certificate from relevant government authorities. For successful application and grant, they must make sure of the following:
- Pay all central, state and local taxes from time to time.
- Submit annual audited financial statements, as well as reports to government authorities.
- Have local permits for carrying out business activities.
- Abide by corporate guidelines like regular board meetings and filling compliances related to MCA and ROC.
How to Get a Certificate of Good Standing?
Various state governments have their own rules and regulations when it comes to issuing a certificate of good standing. You can get this certificate by following these steps:
Step 1: Analyse whether your business entity requires a good standing certificate or not. Many types of companies, like sole proprietorships, do not require them.
Step 2: If your company requires this certificate, the next step involves paying all due taxes, fees and charges.
Step 3: Make sure that you have the documents required for a good standing certificate like quarterly, annually and biennially reports.
Step 4: Once you have completed all the compliances, you have to approach the relevant government entity with a request to grant this certificate.
Step 5: You will have to pay the charges for issuing this certificate to the government agency.
After successful payment, the authorities will go through your application to verify it. If they accept the application, you will receive the certificate within 5-7 working days.