Startups are getting fined, or sometimes banned, by individual states
Startups are struggling to stay compliant in the states they operate in. It's no wonder why, as states don't make it easy on them.
In 2022, Carta’s business license was revoked in Illinois for failing to pay franchise tax, a tax on national corporations doing business in the state, according to state records seen by TechCrunch. In 2024, Washington state terminated cap table software Pulley’s business license, according to state filings.
Carta spokesperson Amanda Taggart told TechCrunch that the company just missed the proper timeline to file its yearly report and pay the corresponding tax. Taggart added that the company has remedied the situation and is waiting on Illinois to return it to good standing. Yin Wu, the founder and CEO of Pulley, said that the company has filed the outstanding returns and is in the process of getting its license reinstated.
Startups like Carta and Pulley are definitely not alone in running afoul of state business rules. Plus, while these companies both had registered in these states as required and ran into issues later, many startups don’t begin the registration process in each state when they should at all.
When startups have employees in a state, conduct an acquisition or sign up customers there, they typically need to register in the state and maintain themselves in good standing. That includes paying their state taxes and fees on an ongoing basis, Andrea Schulz, a lawyer at Grant Thorton, told TechCrunch. If they don’t, they risk being fined by the state, or other consequences.
The problem, experts say, is that each state has its own complex fees, tax, and business registration requirements. And state-level compliance isn’t something top-of-mind for startup founders, nor is it a priority for an early-stage founder’s precious budget dollars, Schulz said.
“In some cases every dollar is going to the customer-facing solution,” Schulz said. “That is really why it ultimately happens. It’s not that it is too onerous, or a lack of expertise in that area.”
Schulz says that, when founders do misstep on state rules and fees, the fines or other issues may not come to light until a startup is being acquired, thinking of going public, or going through an audit.
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