Choosing the right state to start your business might mean the difference between success and failure. This is because different states have vastly different tax environments, labor pools, costs of living and more. To help you make the right decision, we compiled publicly available data from sources such as the Kauffman Foundation, Bureau of Labor Statistics, and the Small Business Administration. We then analyzed the data for each state to put together a definitive ranking of the best states to start a business.
In ranking each state, we chose seven categories that significantly influence an entrepreneur’s chances for survival and success:
- Access to Capital – Venture capital and small business loans
- Startup Activity – Rate of new entrepreneurs and survivability of business
- Taxes – Corporate tax, individual income tax, sales tax, unemployment insurance tax, and property tax
- Cost of Living – Grocery, housing, utilities, transportation, and health
- Labor Market – Location desirability, and bachelor degree attainment
- Quality of Life – Access to healthcare, education, and physical safety
- Cost of Starting a Business – Per capita income and commercial rent
Read on to see which states made the top 10, plus which cities we pick as the best in the state to start a business. We also list our definitive ranking of all 50 states below.
1. North Carolina
The Tar Heel State comes in at the #1 spot for states to start a business, as it dominated the two categories that we consider most important to starting a business: labor market and taxes. The state has high rankings in corporate and unemployment insurance taxes. Its labor market is flourishing as the state grabbed the 6th spot in location desirability. External job seekers are likely lured to the state by thriving businesses, a great sign for would-be entrepreneurs. North Carolina ranks 15th in both rates of new entrepreneurs and business survivability sub-categories.
Best City to Start a Business: Raleigh
With over 12 universities and colleges in the area, Raleigh boasts in the impressive labor market, with 40% of the population over 25 having at least a four-year degree. The city draws businesses in industries such as pharmaceuticals, medical care, and cleantech. This is mainly due to it’s access to high quality research facilities. The city is part of the Research Triangle which also includes neighboring cities – Durham and Chapel Hill. This region has more than 54,000 businesses and over 1.18 million employed.
Utah comes in at # 2 because of its first place ranking in access to capital and the state’s tax friendly climate. Therefore, if you need funds to start a small business, Utah is your best bet. The Beehive State had the highest percentage of loans granted to small businesses at 2.05%, amounting to $2.7 billion in volume. Utah ranks 9th in taxes as it is one of the friendliest in corporate and property taxes.
Best City to Start a Business: Salt Lake City
The biggest city in the state, Salt Lake City is home to the University of Utah, one of the country’s leading biomedical and chemical research institutions. This has helped the city emerge as a technology hub. The city also boasts in awesome quality of life, with plenty of outdoor activities, along with being a safe place to start a family. Even though the city is the largest in the state, it still maintains a low tax rate, with both the corporate and individual tax rates at 5%.
Finishing in third place, Texas performs exceptionally well in six out of seven categories. Entrepreneurs should seriously consider the Lone Star State when starting a business as it ranks 8th in startup activity, 9th in cost of living, 12th in labor market, 14th in both access to capital and taxes, and 20th in cost of doing business. No other state posted such a consistently high ranking in almost all categories.
Best City to Start a Business: Austin
Austin is home to the University of Texas which produces a young and educated workforce. Plus, talent is continually flocking to the city as it ranks 5th in the nation for its ability to attract and retain tech talent. In addition, there are big businesses such as Google and Apple which may require services of a small business. Lastly, VC money fuels the city with $12 billion invested over the last decade according to the Baker Institute.
The Hoosier state comes in as the 4th best state to start a business. Entrepreneurs seeking affordable daily expenses should look into Indiana. The state places 2nd in cost of living with an Index score of 87.9., bannered by cost-efficient marks in all subcategories. Like Utah, small business owners can expect relief in taxes as it finishes 8th. The state is one of the lowest in the country in terms of sales, property, and unemployment insurance taxes.
Best City to Start a Business: Bluffton
Bluffton, a city in the northeast part of the state, has one of the highest average revenues per business in the country. Its 1,003 businesses have an average revenue of $5.06 million.
Rounding out the top 5, Big Sky Country lives up to its name as the rate of entrepreneurs is one of the highest in the country. It ranks 4th in rate of new entrepreneurs at 0.43% which is a couple of points shy from the nation’s loftiest. Rates of new entrepreneurs are soaring partly because the cost of starting a business is low, coming in 5th in that category. On average, small business owners pay $20 per square foot annually for commercial office space.
Best City to Start a Business: Billings
Billings is the largest city in Montana. According to Top Management Degrees, it ranks 6th in the country for business tax climate. Its workforce is also educated with 28.8 percent of its residents holding a bachelor’s degree or higher.
The Show-Me State came in 6th place, as the state did well across the board, ranking within the top 25 in six out of seven categories. Missouri performed particularly well in cost of living where it finished 11th. Expenses related to housing are some of the cheapest in the country as the state scored 75.4 which is almost 25 points below the national average of 100.
Best City to Start a Business: Creve Coeur
Located 15 miles from central St. Louis, Creve Coeur is a hub for technology, life sciences, and bioscience thanks to the presence of Monsanto Co’s world headquarters. Almost half of the city’s businesses have paid employees and the average revenue per business is $5.3 million.
One of the states to be hit hardest by the Great Recession manages to rise above the ashes and sit at the 7th spot of the best states to start a business. Michigan is 3rd in cost of living with an index score of 88.2 where the US average is 100. It also performed well in other categories, ranking 12th in both taxes and access to capital.
Best City to Start a Business: Auburn Hills
Auburn Hills has an amalgamation of industrial, commercial, and residential districts that create a booming economy. As a result, the average revenue per business in the city is a whopping $9.5 million according to Nerdwallet.
8. New Hampshire
New Hampshire lands the 8th spot in our best states to start a business ranking. It places 3rd in quality of life buoyed by stellar performances in healthcare, education, and physical education subcategories. The state is also one of the friendliest states for sales and individual income taxes, garnering an overall ranking of 7th in taxes.
Best City to Start a Business: Manchester
Small businesses bet big on Manchester and for good reasons. CNN Money reports that business owners like the assistance they received from local government and resources were accessible. In addition, business owners had an easy time when it came to business taxes, hiring, regulations, and licensing.
The Evergreen State comes in at # 9 as it ranks well in five out of seven categories. This is highlighted by strong positions in access to capital and labor market where it placed 3rd and 6th respectively. VC money flowed into the state amounting to $1.12 billion, the 6th largest in the country. Small businesses in Washington were able to secure the 12th highest amount of SBA loans at over $5 billion. Its labor force is also formidable with 34.2 percent of its population having a bachelor’s degree – taking 7th place in the degree attainment subcategory.
Best City to Start a Business: Redmond
The home of Microsoft in the state, Redmond is a magnet for entrepreneurs. Small business owners flock to the city as each job produced by the tech giant opens five more jobs in the local economy according to economist Enrico Moretti. Consequently, businesses are raking in $7.4 million on average based on the numbers provided by the US Census Bureau.
The last state in our top 10 list, Massachusetts stands tall in four out of seven categories. Its quality of life is second to none, ranking 1st in access to healthcare and education and 2nd in physical safety. If you need investments, Massachusetts is the place to be as VC money flooded the state in 2016 to the tune of $1.27 billion, earning 2nd place in access to capital. Lastly, The Bay State ranks 2nd in the labor market category with 39 percent of its population having a bachelor’s degree.
Best City to Start a Business: Cambridge
Cambridge attracts some of the country’s brightest talents, thanks to Harvard and MIT. If that’s not enough, the city is also a hotspot for VC money. In 2013, Cambridge secured $933.5 million in investments in biotechnology alone.
Definitive Ranking of All 50 States
We based the ranking of the best states to start a business on 24 metrics across 7 categories. We then analyzed the data to determine the following weights for each category:
1. Taxes – 20 percent
- Corporate Tax Rank
- Individual Income Tax Rank
- Sales Tax Rank
- Unemployment Insurance Tax Rank
- Property Tax Rank
2. Labor Market – 20 percent
- Location Desirability
- Percentage of Bachelor’s Degree Attainment
3. Cost of Living – 15 percent
4. Quality of Life – 15 percent
- Access to Healthcare
- Access to Education
- Physical safety
5. Cost of Starting a Business – 15 percent
- Per Capita Income
- Median Commercial Rent Per Square Foot Per Year
6. Startup Activity – 10 percent
- Rate of New Entrepreneurs
- Survivability of Business
7. Access to Capital – 5 percent
- Venture Capital Investments
- Small Business Loans
For each metric, the top state based on the rankings from our data sources was given 100 points and the bottom state was given 2 points. States between these were indexed proportionally. We multiplied the weight for each metric by each state’s index score to come up with the weighted subtotal. We then multiplied the subtotals by weighted percentages for each category.
Each of the 7 categories was given a weight based on its importance to starting a business. For example, factors such as taxes and access to quality employees were given more weight than access to capital and amount of startup activity. We then added the product of all categories to come up with an overall score which was used to rank each state.
Location desirability and rate of degree attainment
We used data from Indeed, the leading job board site with access to data of millions of users for this metric. To determine location desirability, Indeed tracked the total number of external searchers. The more external searchers a state has, the higher it appears in desirability rankings. For the rate of degree attainment, they relied on data from the U.S. Census Bureau during the period 2008-2012.
Venture capital investments, business survivability, and per capita income:
The data were gathered from SSTI.org, the most comprehensive resource available for those involved in technology-based economic development. SSTI prepared data on venture capital investments by state per capita according to PricewaterhouseCoopers Insights’ Moneytree Report Explorer. For business survivability, they looked at data from the Bureau of Labor Statistics and the Kauffman Foundation and tracked business births and deaths from 2007 – 2013. Lastly, they relied on data released by the Bureau of Economic Analysis to determine per capita personal income by state between 2010 – 2015.
Small business loans
Fit Small Business used data from 2006 – 2015 obtained directly from the Small Business Administration, a U.S. government agency providing support to entrepreneurs and small businesses.
Cost of living per state
The data were derived from the Missouri Economic Research and Information Center, the research division for the Missouri Department of Economic Development. MERIC averaged the indices of cities and metropolitan areas participating in the Council for Community & Economic Research (C2ER) survey on a voluntary basis.
Business tax climate
TaxFoundation.org, the nation’s leading independent tax policy nonprofit, was our data source for business tax climate per state. They ranked states based on the Index which compares states on variables in major areas of taxation such as corporate taxes, individual income taxes, sale taxes, unemployment insurance taxes, and property taxes.
Healthcare and education
We relied on data provided by U.S. News, the leading provider of service news and information. They used six metrics to determine the ranking of each state in terms of healthcare access: child wellness visits, health insurance enrollment, adult wellness visits, adult dental visits, child dental visits and health care affordability. Access to education by the state was ranked on performance in higher education, primary and secondary schooling, and pre-K education.
WalletHub, the pioneer website to offer updated free credit scores and full credit reports, provided data on physical safety. Their analysts compared the 50 states based on key safety metrics ranging from the number of assaults per capita to unemployment rate to estimated losses from climate disasters.
Commercial real estate costs
We sourced data from 42floors.com, the platform for finding and leasing commercial office space. We ranked each state based on the typical asking rate per square foot per year using the website’s real-time and historical data on commercial real estate listings.