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Many companies incorporate in Delaware for its business friendly policies and because investors have come to expect a Delaware corporation, but the first state keeps a careful watch on taxes that are owed. Companies that do not stay in “Good Standing” cannot go about business as usual.

What does “Good Standing” mean?

To be in “good standing” with the State of Delaware, a corporation must have met statutory requirements for doing business in the state. These requirements include filing an annual report as well as paying franchise taxes and a filing fee by March 1. We have resources to assist you in calculating your franchise taxes and the Delaware Division of Corporations provides a portal to submit reports and payment online.

What is a Certificate of Good Standing?

After complying with the statutes, you may request an official “Certificate of Good Standing” from the Secretary of State, also known as a “Certificate of Existence.” This is a legal document that lists the full name of your corporation, your good standing status at the time of request, the date of incorporation, and confirms that your annual reports have been filed and that the franchise taxes have been paid.

Why do I need a Certificate of Good Standing?

Providing a Certificate of Good Standing is often an aspect of due diligence. Most banks require that your business provide evidence of good standing prior to extending lines of credit or awarding loans. Investors ask business owners to show that the company is up to date on its taxes and reporting and most venture capitalists want this proven by obtaining a good standing certificate prior to closing on a funding round. A certificate of good standing is also obtained before completing a merger/acquisition or entering into certain types of contracts with third parties.

How do I fall out of Good Standing?

(a) Failed to file Annual Report/Pay Franchise Taxes. A company is out of good standing when they have not filed their annual report or paid franchise taxes. The delinquency is typically reported to Registered Agents within one week of when the annual report is due (March 1). Following this missed deadline, a late fee and interest on taxes owed is due to the state prior to returning to good standing.

(b) Failed to maintain a Registered Agent in Delaware. A company also falls out of good standing when they do not have a Registered Agent in the state.

What can I do to fix it?

Below is a description of the different classifications of status and actions that you must take when your company has fallen out of good standing.

Void - Company failed to file annual report and pay franchise tax for two years. Reinstatement will cost a late fee and franchise taxes, plus interest. If your company has failed to file more than two times consecutively Delaware will revoke the company charter and it will become void. To return to good standing you must pay an additional fee and submit a Certificate of Revival for a Voided Corporation.

Forfeit - Company does not have a registered agent on file with the Delaware Division of Corporations. Most companies pay an annual fee to retain registered agent services in Delaware. With many registered agent services, ninety days of non-payment will trigger resignation. Then you will receive notification of resignation and an additional 30 days to pay the annual fee. If payment is not received after the full 120 days, the registered agent is officially resigned from representation. The company will lose its charter and to reinstate you must pay a fee and submit a Certificate of Revival for a Forfeit Corporation.

Please note that when your company is void or in forfeit your company name will be available for use or reservation by other entities. Additionally, falling out of good standing does not mean that your company is dissolved. Your company is still liable for unpaid franchise taxes before it can be shut down. If your company is void or forfeit you will stop accruing new franchise taxes, but you are still liable for those you have not paid. Learn more about dissolution and your company status, and contact our Client Services team if you are a Shoobx customer that has fallen out of good standing but wants to pay your franchise taxes—we can help!

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The content and opinions expressed in these posts do not necessarily reflect the views of Shoobx. The content and opinions of Guest Contributors in no way reflect those of Shoobx, nor do they constitute an endorsement of our Guest or of any companies with which they may be affiliated. Blog posts are not legal advice and must not be construed as such. Readers are encouraged to seek professional counsel to address questions specific to their situation.