⚖️ Startups getting fined and banned

Author

Liam Gill
September 24, 2024

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State-Level Compliance: A Crucial Lesson from Carta and Pulley's License Revocations

In 2022 and 2024, Carta and Pulley, two prominent startups, faced license revocations in Illinois and Washington, respectively, due to failures in paying required state franchise taxes and filing annual reports. These situations arose despite both companies having registered in the states as required. The penalties occurred because of missed deadlines for compliance with state tax laws. While both startups have since addressed the issues, these cases highlight the risks startups face when they overlook state-specific compliance requirements, such as filing reports and paying taxes.

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The Importance of Compliance in Every State

Each state has its own rules for registration, taxes, and ongoing compliance, which can be difficult to navigate for startups, particularly when expanding into new regions. When startups have employees, customers, or conduct acquisitions in a new state, they need to register and maintain good standing by filing reports, paying taxes, and meeting other regulatory obligations. Failure to do so can lead to penalties, license revocations, or the suspension of legal protections within the state. This is not only a financial burden but could also lead to operational challenges, particularly during audits, acquisitions, or public offerings, where such issues can become major hurdles.

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Preventing Compliance Issues

To avoid the costly and time-consuming consequences faced by Carta and Pulley, startup founders must prioritize state-level compliance from the beginning. Startups should invest in compliance software or work with legal experts to track filing deadlines and tax obligations in each state they operate. Staying compliant protects the startup's legal standing, minimizes financial penalties, and avoids unexpected disruptions, particularly in crucial moments such as mergers or expansions. Founders should plan proactively, rather than reactively, to ensure that all state-level obligations are consistently met.

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