If your San Diego business is entering into a contract with another business, it is important to investigate the status of the corporation or other entity form with which you are about to enter a relationship. An experienced San Diego corporate attorney can help.

A Certificate of Status is a letter that can be obtained from the California Secretary of State’s Office, which provides the status of a corporation doing business here in the Golden State. The most common Certificate is a Certificate of Good Standing. This means that the corporation has filed its annual Statement of Information, tax returns, paid the requisite fees and, importantly, is current with its Franchise Tax payments. While the Certificate of Status is provided by the Secretary of State, the key criterion is provided by the California Franchise Tax Board. A corporation that has not paid its Franchise taxes — essentially, its income taxes — will be not be considered in good standing. A Certificate of Status might also indicate that the corporation is not in good standing, that the corporation is exempt or that there is no information with respect to the corporation.

There are three important reasons for checking corporate status before signing the contract.

First, a corporation not in good status is a corporation that is not well run and that should be a “red flag” for your business. Maybe the lack of good standing is a mistake and the filings were overlooked. Both are hallmarks of a business that might not be up to your standards.

Second, there might be less innocent reasons for not being in good standing and such reasons might put your business at risk. If, for example, the errant corporation has not paid its franchise taxes, maybe the company is having cash flow problems. Maybe then advance payments made by your business end up being used to pay past due invoices and past due taxes. That could be financially risky.

Third, being in “good standing” affects whether a corporation can validly enter into contracts. If a corporation signs a contract while not in good standing, the offending corporation cannot enforce the contract until the corporation returns to a status of good standing. If the problem is a large unpaid Franchise Tax invoice, then the company may never be in good standing again. This issue is not with the particular contract that your business is considering since your business, being in good standing, can enforce the contract it signed. Rather, the issue is contracts that are upstream or downstream from your contract. The not-in-good-standing business cannot enforce those contracts which might impact execution of the contract you are signing.

For these and other reasons, it is prudent and good business practice to periodically check up on the status of companies with which you have contractual relations.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard via email or by calling (858) 483-9200. Like us on Facebook.

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