In 2022, Carta's license was revoked in Illinois for failing to pay franchise taxes, which are levied on domestic companies doing business in the state, according to Illinois records reviewed by TechCrunch. In 2024, Washington state revoked the license of capital table software Pulley, according to state filings.
Carta spokesperson Amanda Taggart told TechCrunch that the company missed the deadline to file its annual report and pay the corresponding taxes. Taggart added that the company has remedied its situation and is waiting for the state of Illinois to reinstate the company in good standing. Pulley founder and CEO Yin Wu said the company has filed its outstanding returns and is in the process of having its license reinstated.
Startups like Carta and Pulley aren't the only ones violating state business rules. Moreover, while both of these companies registered with these states as required and ran into problems later, many startups never started the registration process in each state when they should have.
If a startup wants to hire employees, make acquisitions, or gain customers in a state, it typically has to register and stay in good standing with the state, which includes paying state taxes and fees on an ongoing basis, Grant Thorton attorney Andrea Schulz told TechCrunch, or risk incurring fines and other penalties from the state.
The problem, experts said, is that each state has its own complex set of fees, taxes and business registration requirements — and state-level compliance isn't a top priority for startup founders, nor is it a priority of early-stage founders' precious budgets, Schultz said.
“In some cases, every dollar goes to a customer-facing solution,” Schultz said, “and that's why it ends up that way. It's not because it's too much hassle or because they lack expertise in that area.”
Schultz said if founders misbehave with state rules and fees, fines and other issues may not be discovered until the startup is acquired, considers going public or is audited.
Ginger Mutoza, a paralegal and corporate legal operations manager at contact center software company 8×8, told TechCrunch that she's seen it firsthand: She said her firm is currently working to clean up compliance at a company it acquired, an issue that came to light after the due diligence process.
“They took the easy way out. They didn't tell employees about other mergers or stock option issuances. Tax claims have to be backdated,” Mutoza said. “They have to start over with the company and history. It's going to be hugely expensive to right these wrongs. It's just going to get more expensive every year.”
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The main reason state-level compliance is so difficult for startups is that the states don't make it easy: each state requires different information, in different formats, to keep your company in good standing.
Robert Holdheim, COO of back-office and compliance platform Traact, told TechCrunch that no customer using his company's platform has yet properly considered all state compliance, even if they think they have.
“I agree with everyone else: It's a pain,” Holdheim said. “This is one of those areas that's always been left to the states. Every state does something completely different. There's no easy access to the information. There's very little digital information. You have to call and wait on hold for hours.”
Illinois, the state that eliminated Carta, is known to be particularly strict: it still only accepts paper applications and check payments.
Rules also vary on when startups must register: As for customers, some states require companies to register if they have some vaguely “substantial” amount of business in the state, Muthoza said.
Most states require employees to register in the state they live in, says Bruno Drummond, a certified public accountant and founder and partner at consulting firm Drummond Advisors. If a company tells employees they can work from anywhere, it ends up having to register as a foreign entity every time an employee moves to a new state. Many companies aren't prepared.
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The good news for most startups is that the consequences of getting the state rules wrong are usually relatively minor: Companies pay their overdue taxes and penalties and get back on good footing.
But the consequences could be more severe: If state fines or problems against a startup become too onerous, this could be a trigger for an acquirer to walk away if they don't want to pay to clean up the mess, Schultz said.
Not being a legal business entity in a state can also impact your startup’s legal protections in that state.
“If you can't be in good standing as a corporation in a state, all of the legal protections that your corporation has are officially suspended,” Holdheim said, specifically pointing to Texas. “If someone sues you in Texas and your Texas corporation is not in good standing, you automatically lose. If you don't have legal protections in that state, you can't go to court.”
He's referring to Section 9.051 of the Texas Business Organization Code, which prohibits unregistered corporations from defending themselves against lawsuits in state court, which could also be the case if a startup is not in good standing and wants to file a lawsuit in the state — for example, by suing another company for using the startup's proprietary intellectual property.
Drummond said startups may be negligent in other areas, such as sales tax. He added that companies with investments or revenues over $50 million are required to submit monthly reports to the U.S. Bureau of Economic Analysis, but most don't. Hiring talent outside the U.S. also adds another layer of complexity to compliance.
Ultimately, state-level regulations need to be factored into founders' business plans as early as possible, whether that's through investing in compliance software or hiring legal experts. Traact isn't the only company that can help startups stay on top of state compliance: Mosey is another venture-backed startup; DFIN and Vanta are larger companies that provide compliance services.
“These entrepreneurs and founders kick the ball and then they just chase the ball. They don't plan it or say, 'I'm going to kick it that way,'” Drummond says. “Every time they kick the ball, they have to follow some rules to avoid getting penalized.”