State Compliance Fines Hit Startups Hard, Creating Costly Headaches


Last updated: February 5, 2025

In 2022, Carta’s business license was revoked by Illinois for missing franchise tax payments, according to state filings seen by TechCrunch.

Fast forward to 2024, and Washington state terminated cap table software Pulley’s business license over a similar issue.

Carta’s spokesperson, Amanda Taggart, clarified that the company missed a deadline for filing its annual report and paying the associated tax.

They’ve since remedied the situation and are waiting for Illinois to reinstate their license. Pulley’s CEO, Yin Wu, shared that they’ve filed the necessary returns and are working on reinstating their good standing.

It’s a familiar tale for startups like Carta and Pulley—falling into trouble with state regulations isn’t rare.

And while these companies at least registered, many startups don’t even begin the process, despite needing to.

When startups hire in a state, acquire a company, or sign new customers, they typically need to register and stay compliant by paying taxes and fees. If they don’t, fines—or worse—could follow.

As Andrea Schulz, a lawyer at Grant Thornton, explained, the risks of non-compliance can be severe, and it’s often overlooked in the early stages.

The challenge? State regulations are a maze. Each state wants something different. Filing formats change.

Fees vary. For early-stage founders focused on growth, it’s easy to let these things slip. Schulz notes that this isn’t due to a lack of expertise—it’s just not a priority.

“In some cases, every dollar is going to the customer-facing solution. That is really why it ultimately happens.”

These issues often come to light during acquisitions, IPOs, or audits. Ginger Mutoza, corporate legal operations manager at 8×8, has experienced it firsthand.

“We’re cleaning up compliance for a company we acquired. They didn’t report mergers or stock option issuances. Now, we’re going back past the statute of limitations for tax claims. It’s become expensive to fix those errors, and they compound year after year.”

Part of the problem is the complexity of compliance. “No customer we’ve worked with has had their state compliance fully in order,” said Robert Holdheim, COO of Traact, a back-office compliance platform.

States don’t make it easy—Illinois, for instance, still requires paper filings and payments by check.

Registration rules also vary. Some states require startups to register if they have employees there; others when they do a “substantial” amount of business.

The ambiguity makes it easy for companies to fall out of compliance. And when companies allow remote work, they face the added burden of filing as a foreign business entity every time an employee moves to a new state.

For most startups, the penalties are manageable—usually just back taxes and fines.

But Schulz warns that unresolved compliance issues could derail an acquisition if the buyer doesn’t want to foot the cleanup bill.

And not being in good standing can strip a startup of its legal protections. Holdheim pointed out that in Texas, businesses that aren’t compliant can’t defend themselves in court.

On top of this, startups may miss requirements for things like sales tax or federal reporting.

Companies with over $50 million in revenue are supposed to file monthly reports with the Bureau of Economic Analysis, but many don’t. Hiring employees outside the U.S. adds another layer of compliance complexity.

The takeaway is clear: compliance must be part of a startup’s early plans. Whether through software like Traact or Mosey or by hiring legal experts, startups need to stay on top of state rules.

As Bruno Drummond of Drummond Advisors puts it, “Founders kick the ball forward without realizing they’re kicking it straight into a compliance penalty.”

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About The Author

Venture Smarter | State Compliance Fines Hit Startups Hard, Creating Costly Headaches
Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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Venture Smarter | State Compliance Fines Hit Startups Hard, Creating Costly Headaches
Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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