As of 2016, there were almost 30 million small businesses in the United States. To succeed, small businesses need a favorable economic environment to limit costs, a high-quality labor market, and a local quality of life that attracts both employees and clients. We compiled and analyzed publicly available data for all 50 states to compile a definitive ranking of the best states to start a business in 2018 to help you decide where to start your business.
In ranking each state, we chose seven categories key to business success and quality of life:
- Cost of Starting a Business – This category includes rankings for per capita income in each state to evaluate how much it will cost to staff your business, and the cost to rent a commercial building per square foot per year to measure how expensive it is to house your business.
- Taxes – This category represents rankings for corporate, individual income, sales, unemployment insurance, and property tax rates. Together, these rates demonstrate how much your business will have to pay in taxes in each state.
- Cost of Living – The cost of living in each state was evaluated based on grocery, housing, utilities, transportation, and healthcare costs.
- Labor Market – The strength of each state’s labor market was assessed based on location desirability (unemployment rate) and the percentage of adults age 25 to 34 with a bachelor’s degree or higher. This metric measures the availability of workers in each state.
- Startup Activity – These data represent the number of new businesses and the survivability of businesses in each state. Startup activity demonstrates whether new businesses are likely to succeed in each state.
- Access to Capital – This category evaluates access to capital based on the amount of venture capital funds and the size and number of small business loans granted in each state. This metric illustrates how likely your small business is to get startup capital.
- Quality of Life – Quality of life is represented by three metrics: access to healthcare, education, and physical safety.
Read on to see which states made the top 10 in 2018, 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, including the research methodology used to rank each state.
The top 10 states to start a business in 2018 are:
1. New Hampshire
The Granite State comes in 1st place for states to start a business, dominating with the lowest startup cost and the best labor market. New Hampshire ranked 4th for best quality of life and has high rankings in the tax category (7th). The state ranked poorly for startup activity (49th), but New Hampshire’s other strengths outshine its low business birth and survivability scores to keep it at the top of our list.
New to our list, New Hampshire is home to Portsmouth—a vibrant community along the Piscataqua River, just across from Maine. In addition to hosting a U.S. Small Business Administration office, the city features a charming downtown that attracts tourists and local students with its shops and restaurants.
2. Massachusetts
Massachusetts comes in 2nd place because of its high ranking in access to capital, startup activity, quality of life, and labor market. If you need investments, Massachusetts is the place to be, as the state snagged the top spot for VC investments and the 3rd spot for overall access to capital. Plus, Massachusetts had the highest ranking for access to education and the highest percentage of bachelor’s degree attainment, making the state’s quality of life and labor market excel beyond other states.
Not only is Massachusetts the 2nd best state to start a business in 2018, Boston made our list of one of the best cities in the U.S. for startups as well as one of the most entrepreneurial cities. Boston is the top choice of venture capitalists in North America as startups in the city received more than $6 billion in investments in 2016. The city is also home to one of the largest populations of college-educated professionals in North America, with 46.3 percent of its residents holding a bachelor’s degree or higher.
3. Wyoming
Finishing in 3rd place, Wyoming performs exceptionally well for taxes, cost of living, and the cost of starting a business. Small business owners can expect relief in taxes, as Wyoming finishes 1st overall. Plus, entrepreneurs seeking affordable daily expenses will enjoy the 3rd lowest cost of starting a business and 11th best cost of living. The state also performed well in several sub-categories—especially per capita income (8th), public safety (9th), and access to education (15th).
If you’re looking for a place in Wyoming to call home, look no further than Cheyenne. Not only is Cheyenne the state’s capital, it offers small business owners affordable office space and a strong talent pool from the nearby University of Wyoming in Laramie. The city is also the most populous in Wyoming, so you can market to a larger audience than elsewhere in the state.
4. Nebraska
The Cornhusker state comes in as the 4th best state to start a business—up from 16th. Entrepreneurs should seriously consider Nebraska when starting a business, as it boasts the 7th best labor market, 7th best access to capital, and 10th lowest cost of starting a business. These business-friendly factors combined with high access to education and small business loans make Nebraska a great place to start a business in 2018.
If you’re planning to start a business in Nebraska, seriously consider Omaha, located just an hour outside the state’s capital. Beyond several independent business incubators and accelerators, the University of Nebraska-Omaha’s Center for Innovation, Entrepreneurship & Franchising produces a new batch of talent each year. Plus, the city attracts an impressive client base with its music and theater scene.
5. South Dakota
Downtown Sioux Falls, South Dakota
Rounding out the top five, up from 20th, the home to Mount Rushmore received high marks in taxes and cost of starting a business. It has the second lowest tax rates in the country and entrepreneurs will rejoice over the second lowest overall cost of starting a business. Rates of new entrepreneurs are low, but business survivability is high, with South Dakota coming in 4th in that category.
The city of Sioux Falls, SD, accounts for over 20 percent of the population of South Dakota and is a great place to start a small business in the state. In addition to the huge potential workforce graduating from local universities, Sioux Falls offers a Small Business Development Center to assist local entrepreneurs.
6. North Dakota
North Dakota came in 6th place, as the state did well across the board, ranking within the top 10 in three of our categories. North Dakota performed particularly well in the cost of starting a business and the labor market, where it finished 2nd and 3rd, respectively. The quality of life in the state is also among the highest in the country, as the state ranked 10th for access to education, 14th for access to healthcare, and 17th for public safety—giving the state the overall 6th place ranking.
North Dakota is up from 29th in last year’s study due to impressive showings in the labor market, quality of life, and cost to start a business categories. As the largest city in North Dakota, Fargo is also the county seat of Cass County and a great place to start a small business. Fargo also borders Minnesota and is close to Grand Forks, ND, where the University of North Dakota is located.
7. Iowa
Downtown Cedar Rapids, Iowa
The Hawkeye state sits at the 7th spot of the best states to start a business in 2018. Based on our metrics, Iowa placed 6th for quality of life, 7th for cost of starting a business, and 9th for the labor market, making the state a well-rounded choice for someone starting a business. Plus, office space is the most affordable in the country, with small business owners paying only $17 per square foot annually for commercial office space.
Demonstrating an impressive improvement over last year’s ranking, Iowa succeeds in part because of the high quality of life and low cost of starting a business in the state. Whether you already live in Iowa or are considering moving, visit Des Moines. In addition to attracting students to Drake University, the city offers a variety of small business-oriented resources like Gravitate Coworking and several local Chambers of Commerce.
8. Colorado
Returning to the list this year, colorful Colorado lands 8th as the best state to start a business. It places 2nd in our labor market category, buoyed by stellar performances in the venture capital and per capita income subcategories. Colorado is also one of the best states for access to healthcare, garnering the 9th overall ranking.
Within the beautiful state of Colorado, the Mile High City shines as one of our most entrepreneurial cities in the U.S. for 2018. In the city of Denver, 71.6 percent of entrepreneurs rely on their business as their primary source of income. Plus, the city yields 390 new entrepreneurs out of 100,000 adults each month. Lastly, there are around 92 firms per 1,000 employer businesses that are less than one year of age to take the tenth spot in the category.
9. Utah
The Beehive State comes in 9th on our list as it ranks well in four out of seven categories. This is highlighted by strong positions in access to capital and taxes, where it placed 5th and 8th, respectively. VC money represented 0.63 percent of Utah’s gross state product, ranking the state fourth for that subcategory. Utah also performed extremely well for quality of life, snagging the number 8 spot and featuring the third highest access to education in the country.
Utah ranked 2nd last year and offers a wealth of benefits to small business owners. Check out Salt Lake City for everything you’ll need when starting your business—affordable real estate, a low tax bill, and potential employees from the University of Utah, Utah State, and Brigham Young University. The city is also located along the Interstate 15 tech corridor and is home to eBay, numerous tech companies, and successful VC-funded startups.
10. Kansas
The last state in our top 10 list, Kansas stands in several of the seven categories, but is strongest for cost of living, where it ranked 8th on our list. The state also performed well due to its 13th ranked labor market bolstered by a low unemployment rate and high rate of bachelor degree attainment, with 35.6 percent of adults age 25 to 34 having a bachelor’s degree or higher.
Up from number 11 last year, Kansas performs consistently well in our survey. If you’re planning to start a small business in Kansas, check out Kansas City on the beautiful Missouri River. Not only is Kansas City home to numerous universities and shared work spaces, its close proximity to Overland Park gives it access to the capital every business needs to succeed. Plus, the city is just across the river from Kansas City, Missouri, which offers additional resources for your small business.
Other States to Consider
The metrics we used in this study focus on state-based data, but there are cities well outside of our top 10 states that are great for companies and should be considered when starting your business. Despite the states ranking outside the top 10, some cities in Texas, Florida, and California are prime territory for startups and entrepreneurs in 2018 because of key cities that are still great options for starting a small business in 2018.
Texas
The Lone Star State ranks 16th on our list, but cities like Dallas, Austin, and Houston are among the friendliest cities for startups and entrepreneurs in the country. Dallas is the 5th in our best city for startups and the 4th in our study of the most entrepreneurial city in the U.S. Similarly, we named Austin the 8th and 9th best city for startups and entrepreneurs, respectively. Finally, Houston is the 5th most entrepreneurial city in the U.S. for 2018.
Florida
The Sunshine State ranks 20th overall on our list. However, several cities in the state rank highly for the most entrepreneurial cities in our 2018 study. Miami ranks 1st because of its high birth rate for new entrepreneurs, startup density, and venture capital funds. In addition, Orlando ranked 14th because of the high startup density and tax-friendly policies in the city. The city is also home to a large percentage of entrepreneurs who rely on their business as their primary income source.
California
California ranks low on our list (43rd) due to high taxes, cost of living, and the cost of starting a business. However, it gets an honorable mention because the state is home to some of the most entrepreneurial and startup-friendly cities in the country.
Not only is Los Angeles the 3rd most entrepreneurial city in the U.S. according to our recent study, San Francisco ranked 7th and San Diego ranked 13th. In addition, San Diego and Los Angeles are the 6th and 9th best cities for startups according to our 2018 study, respectively.
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Methodology
We based the ranking of the best states to start a business on 13 metrics across seven categories. For each metric, the top state based on the rankings from our data sources was given 100 points and the bottom state was given two 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, multiplying the subtotals by weighted percentages for each category.
Each of the seven 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.
We analyzed data for seven categories:
Cost of Starting a Business: 15 Percent
The cost of starting a business in each state is represented by two factors:
- Per capita income
- Median annual commercial rent per square foot
Per capita income for each state was obtained from a Bureau of Economic Analysis report on state’s personal income for 2017. Commercial real estate data was obtained from 42floors.com, which provides the median cost to rent commercial real estate per square foot per year based on real-time and historical data on commercial real estate listings.
Taxes: 20 Percent
States were ranked by several tax rates that include:
- Corporate tax rate
- Individual income tax rate
- Sales tax rate
- Unemployment insurance tax rate
- Property tax rate
TaxFoundation.org, the nation’s leading independent tax policy nonprofit, was our data source for the business tax climate in each state. They ranked states based on an index that compares states on variables in major areas of taxation such as corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes.
Labor Market: 20 Percent
Each state’s labor market was evaluated based on two factors:
- Location desirability
- Percentage of bachelor’s degree attainment
To evaluate location desirability, we ranked the states based on unemployment rate data from the Bureau of Labor Statistics, which represents seasonally adjusted unemployment rates for May 2018.
Degree attainment data represent the percentage of adults age 25 to 34 with a bachelor’s degree or higher for the year 2015 and were obtained from the American Community Survey performed by the NCHEMS Information Center for Higher Education Policymaking and Analysis.
Cost of Living: 15 Percent
The cost of living in each state was determined based on six major factors:
- Grocery
- Housing
- Utilities
- Transportation
- Health
- Miscellaneous
Data were derived from the Missouri Economic Research and Information Center (MERIC). To determine a composite cost of living for each state for 2018, MERIC averaged the indices of cities and metropolitan areas that voluntarily participated in the Council for Community & Economic Research (C2ER) survey.
Startup Activity: 10 Percent
Startup activity in each state was evaluated based on:
- Rate of new entrepreneurs
- Survivability of business
Fit Small Business relied on data compiled by the State Science and Technology Institute (SSTI), which used data from the Kauffman Foundation and the Bureau of Labor Statistics to track the number of business births in 2007 and the survival rate of businesses from 2007 to 2013.
Access to Capital: 5 Percent
Access to capital was determined based on the availability of two kinds of funding:
- Venture capital investments
- Small business loans
State-specific venture capital investment data were gathered from SSTI’s report on total VC investments in 2016 and 2017, which reflects the intensity of venture capital investments as the percentage of each state’s gross state product according to data from the Bureau of Economic Analysis, the Information Technology and Innovation Foundation, and the NVCA-Pitchbook Venture Capital Monitor.
To determine the best states for getting small business loans, Fit Small Business used data obtained directly from the Small Business Administration (SBA) and divided the total amount of loans under $100,000 granted in each state by the total number of loans made in each state.
Quality of Life: 15 Percent
Quality of life was evaluated based on three metrics:
- Healthcare – Healthcare access was determined based on six metrics: child wellness visits, health insurance enrollment, adult wellness visits, adult dental visits, child dental visits, and healthcare affordability.
- Education – Access to education was ranked on performance in higher education, primary and secondary schooling, and pre-K education.
- Public Safety – Public safety was measured based on the rate of property crimes and violent crimes in each state.
To determine the overall quality of life in each state, we relied on data provided by U.S. News, a leading provider of service news and information.
Bottom Line
Each state is characterized by different tax climates, qualities and costs of living, labor market, cost of starting a business, access to capital, and startup activity. We ranked all 50 states based on publicly available data from the Kauffman Foundation, Bureau of Labor Statistics, SBA, and more. We then assigned a weight to each category, analyzed the data, and ranked the best states to start a business in 2018. Now, where will you start yours?
Michael Andy
Thank you so much for sharing such a useful information. It will help a lot to the people who are looking to start a business in such states. It contains a list based on business and market research which will help them to choose the right business for them.
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Hi Michael,
Thanks for stopping by and commenting!
Maggie
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