Startups are facing a growing number of challenges with state-level business compliance, and it’s costing them—literally. Recent incidents involving major startups like Carta and Pulley highlight a critical issue: getting fined or even banned by individual states for failing to meet state-specific requirements. Let’s dive into why this is happening and what startups can do to avoid these pitfalls.
State Compliance: A Growing Concern for Startups
In 2022, Carta, a prominent equity management platform, had its business license revoked in Illinois due to missed franchise tax payments. Similarly, Pulley, another cap table software company, had its license terminated in Washington state in 2024. These issues underscore a crucial aspect of running a startup: state compliance.
The Challenge of State-Level Compliance
Here’s why state compliance is a significant issue for startups:
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Complex Regulations: Each state has its own set of rules regarding business registration, taxes, and fees. These regulations can be confusing and vary greatly from state to state.
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Resource Constraints: Startups often operate on tight budgets and may prioritise product development and customer acquisition over legal compliance.
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Delayed Issues: Compliance issues may not surface until a company is being acquired, going public, or undergoing an audit, leading to costly and time-consuming fixes.
Case Studies: Carta and Pulley
Carta’s License Revocation
In 2022, Carta’s business license was revoked in Illinois for failing to pay franchise tax. According to Amanda Taggart, a spokesperson for Carta, the company simply missed the deadline to file its yearly report and pay the tax. They’ve since rectified the situation and are awaiting reinstatement.
Pulley’s Licensing Trouble
Similarly, Pulley faced issues in Washington state in 2024. Founder and CEO Yin Wu stated that the company has addressed the outstanding returns and is in the process of getting its license reinstated.
Why State Compliance Is Crucial for Startups
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Registration Requirements: Startups need to register in states where they have employees, customers, or conduct significant business activities. Failure to do so can result in fines or even the revocation of business licenses.
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State-Specific Rules: Each state has different rules for registration, reporting, and compliance. For instance, Illinois still requires paper filings and check payments, which can be particularly cumbersome.
Consequences of Non-Compliance
Not complying with state regulations can lead to several consequences:
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Fines and Penalties: Startups may face fines for late payments or non-compliance. These can accumulate over time and become a significant financial burden.
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Acquisition Risks: Compliance issues can deter potential acquirers or investors who are wary of inherited problems.
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Legal Vulnerability: In some states, like Texas, not being in good standing can impact a startup’s ability to defend itself in court. Section 9.051 of the Texas Business Organizations Code prevents unregistered businesses from defending themselves in lawsuits.
Strategies to Manage State-Level Compliance
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Invest in Compliance Software: Platforms like Traact and Mosey offer tools to help startups manage state compliance. These can simplify the process and reduce the risk of errors.
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Hire Legal Experts: Consulting with legal experts can help navigate the complex web of state regulations. Firms like DFIN and Vanta provide comprehensive compliance services.
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Plan Ahead: Incorporate state-level compliance into your business strategy from the start. Regularly review and update your compliance practices to avoid issues.
Conclusion
State-level compliance is a critical but often overlooked aspect of running a startup. The experiences of companies like Carta and Pulley highlight the importance of staying on top of state-specific regulations to avoid fines, legal issues, and operational disruptions. By investing in compliance tools, seeking expert advice, and planning ahead, startups can navigate these challenges more effectively.
Relevant Links for Further Reading:
- Franchise Tax
- Business Registration Requirements
- State Compliance Challenges
- Legal Compliance for Startups
- Business License Issues
