Investors want to be sure that they are giving their funds to the right hands when businesses need financing. In addition to a good business concept, good leadership, and growth potential, investors seek legal and operational credibility. The Certificate of Good Standing is one of the documents the helps prove this.
The certificate confirms that a company is legally registered and meets the requirements of the state and is permitted to trade. Why is this piece of paper important to investors, however? Let’s know about it.
What Is a Certificate of Good Standing?
A certificate of good standing is a state-level document that is issued by the state in which your business is incorporated. It serves as proof that:
- Your firm is organized or incorporated.
- All state filings, like annual reports, etc., are current.
- Taxes and other charges required have been paid.
- Your company can operate in that state.
It does not give you any information concerning the financial performance of your company or the position in the market, but only indicates that everything is all right.
The Reason Investors Like a Certificate of Good Standing
Most people look at a lot of issues before they invest their money. The Certificate of Good Standing gives them comfort on some fronts:
- Proof of Legal Compliance
Investors are concerned that the business they are funding is legal. A Certificate of Good Standing also attests to the fact that the company has been adhering to all its obligations that the state conditions its functioning, i. e. the company provides an annual report and pays the franchise taxes.
- Lower Investment Risk
Investors may be subjected to unwarranted risks by funding an entity where compliance problems have not been resolved. In the absence of this certificate, the business may be dissolved or size-limited, and the investment may not be stable.
- Smooth Transaction Process
Investors would want a clean business situation when they are drafting contracts or filling out due diligence forms. The certificate puts fears of a possible legal roadblock behind the back and helps ease funding.
- Growth in Business Management
Being in good standing is a sign of good management. This gives the investors a good reason to believe that leadership takes compliance seriously and that usually leads to a cautious approach toward financial and operational issues as well.
Cases in which the Certificate will be requested by the investors
Investors often request a Certificate of Good Standing in any financing round, but they usually do so in a situation where:
- Venture Capital or Angel Investments – This may become a point of contention when it comes to negotiating big-ticket investments, particularly those involving equity.
- Mergers and Acquisitions – During the time when a company decides to purchase or merge with another enterprise, compliance is essential.
- Loan Applications – This certificate is often required by Banks and private lenders prior to providing business loans.
- International Expansion – Credibility is essential when it comes to international investors or business associates.
How Businesses Can Stay Prepared
Businesses must remain proactive in regards to compliance so as not to waste time in the funding process. Some of these steps include:
- Monitor filing deadlines – See that annual reports and franchise taxes are timely filed.
- Keep records up to date–store business records in order.
- Check–there are rules of compliance that might differ across states.
- Get the Certificate in Advance- Have the document in place before investors place the order.
How to obtain a certificate of good standing
How to get a certificate of good standing is usually quite simple:
- Visit the website of your Secretary of State–most states permit businesses to apply online to obtain certificates.
- Enter Business Details- Enter business name, business type, and registration no.
- Confirm compliance – confirm that all necessary filings and fees are fulfilled before applying.
- Pay Fee- states typically impose a low fee on the issuance of the certificate.
- Get your Certificate-Receive the certificate immediately or by post in many states, others mail the certificate.
Final Thoughts
A certificate of good standing is not just a waste of time; it is a sign to investors that your company is responsible, compliant, and trustworthy.
Investors require confidence, and presenting this paper means that your business is not going to skimp on its legal and operational state of affairs. When you are funding, one of the best things you can do is to get your certificate early. See more information, clearskinstudy.org.
