## The Challenge: Navigating State-Level Compliance for Startups
Startups face numerous challenges as they navigate the complex landscape of state-level compliance. Each state has its own set of fees, taxes, and business registration requirements, making it difficult for founders to keep up with the ever-changing regulations. Furthermore, compliance is often not a priority for early-stage startups, who are more focused on developing their customer-facing solutions and allocating their limited budgets. This lack of attention to state-level compliance can lead to fines and other consequences down the line, often coming to light during acquisitions, public offerings, or audits.
One of the main difficulties for startups is that states make the compliance process anything but easy. Each state has different requirements, and startups are often left grappling with gathering and submitting the necessary information in the correct format. Robert Holdheim, the COO of back office and compliance platform Traact, highlights the frustration of dealing with the states, stating, “There is no ability to easily access information. There’s very little digital information. You have to call in and wait for hours and hours.”
Illinois, in particular, is notorious for its challenging compliance process. It still only accepts paper filings and payments by check, adding an additional layer of complexity for startups trying to navigate the system. Moreover, the rules regarding when a startup needs to register can vary. Some states require registration when a company is doing a “substantial amount” of business, while most states require registration when employees are located within the state. This creates confusion and leaves room for startups to fall behind on their compliance obligations.
## Consequences of Non-Compliance
While the consequences of non-compliance are generally mild, they can have more severe implications for startups. In most cases, companies simply need to pay back taxes and fines to regain good standing. However, if the fines and issues become too burdensome, it could deter potential acquirers from proceeding with a deal. Acquirers may not want to take on the responsibility and costs of rectifying compliance issues, leading them to walk away from the transaction.
Additionally, not being a legal business entity in a particular state can impact a startup’s legal protections within that state. For example, in Texas, if a startup’s entity is not in good standing, it may lose its legal protections and be unable to defend itself against lawsuits in state courts. This lack of legal standing can also hinder startups from initiating lawsuits in a state to protect their intellectual property or other proprietary assets.
Furthermore, startups may also overlook other areas of compliance, such as sales tax or reporting requirements mandated by the U.S. Bureau of Economic Analysis for companies with over $50 million in investment or revenue. Hiring employees outside of the U.S. can further complicate compliance efforts. Therefore, startups need to consider state-level regulations early on and prioritize compliance in their business plans. Investing in compliance software or seeking assistance from legal experts can help startups stay up-to-date and avoid penalties.
## The Way Forward: Prioritizing Compliance and Seeking Support
To navigate the challenges of state-level compliance, startup founders must shift their mindset and prioritize compliance from the outset. Rather than treating compliance as an afterthought, founders should integrate it into their overall business strategy. This could involve investing in compliance software or enlisting the support of legal experts who specialize in state-level regulations.
Fortunately, there are companies like Traact, Mosey, DFIN, and Vanta that offer compliance services and can assist startups in staying abreast of state-level requirements. By proactively addressing compliance needs and staying up-to-date on regulations, startups can avoid penalties, protect their legal standing, and ensure a smoother path to growth and success.
In conclusion, state-level compliance presents significant challenges for startups, with each state having its own unique set of requirements. However, by recognizing the importance of compliance early on, leveraging available resources, and seeking expert assistance, startups can navigate the complexities of state-level regulations and safeguard their legal standing and future growth.
