Entrepreneurial activity across the United States remains robust. The US Census Bureau recorded approximately 5.4 million business applications in 2021, a 53% increase from 2019. This momentum continued into 2022, with nearly half a million new applications filed in June alone. As more individuals launch ventures, the question shifts from whether to start a business to where to start it.
Choosing the right startup location is a strategic decision impacting tax liabilities, regulatory compliance, and operational costs. Every state has distinct tax rules, small business regulations, and consumer demands. Selecting the optimal home for your startup can reduce administrative burdens and financial strain. We examine the key factors determining the best states to start a business and the worst states to start a business.
Key Factors That Influence Your Decision
Residency and Registration Nuances
You do not necessarily have to register your business in your state of residence. The “home state” is where the company is legally formed, while operations can occur elsewhere. However, companies operating in multiple states often must register in each. Deryck Jordan, managing attorney at Jordan Counsel, notes that initial registration can happen in any of the 50 states, followed by qualification as a foreign company in other states where business is conducted.
Registering in your home state often makes sense for three reasons. First, qualifying as a foreign corporation incurs time and expense, which may negate benefits of a low-tax jurisdiction. For instance, paying a $600 foreign corporation fee and filing extra annual reports can offset savings from lower taxes. Second, banking is easier when your business account is at the same institution as your personal accounts. Third, familiarity with local tax requirements and existing relationships with accountants provide a practical advantage.
Regulatory Environment and Compliance
Operating in states with strict small business regulations can present significant hurdles. Some jurisdictions enforce stringent licensing laws, zoning requirements, hiring policies, and health and safety standards. Onerous licensing regulations can delay or prevent a business from launching. California, for example, requires separate licenses to cultivate, manufacture, distribute, and sell CBD products, adding layers of complexity and cost.
The states with the strictest business compliance requirements include Alabama, California, Florida, Virginia, and Tennessee. Additionally, understanding state-specific regulations during public health crises is vital. Virginia, Vermont, the District of Columbia, Hawaii, and California have historically maintained more restrictive measures during outbreaks, which can impact operational continuity.
Tax Climate and Financial Impact
Taxation is a critical factor in determining the best state to start a business. States like New Jersey and Pennsylvania impose high corporate tax rates, making them expensive locations for new ventures. Conversely, states like Texas and Wyoming do not levy corporate income taxes. When evaluating a location, consider the corporate tax, individual income tax, sales tax, and property tax rates.
While calculating taxes can be complex, tools are available to simplify the process. For example, OnPay offers a tool to calculate California taxes easily. Understanding the full state tax climate helps you anticipate your financial obligations and plan accordingly.
Cost of Living and Operational Expenses
Your personal living costs also contribute to your overall expenses. States like California and New York are known for high real estate prices and a high standard of living. Nellie Akalp, CEO of CorpNet, advises first-time entrepreneurs to consider business formation fees, which can range from $100 to several thousand dollars, and annual compliance fees for licenses and certificates. Investor appeal is another factor; unfavorable business laws in a state can hinder fundraising efforts.
Other expenses include equipment, inventory, and delivery fees. Many of these business expenses are tax-deductible, which can provide relief if you operate in a high-tax state. Evaluating the total cost of doing business, including personal living expenses, provides a clearer picture of your financial runway.
Growth Potential and Market Dynamics
When selecting a home base, consider the state’s workforce and the market demand for your product or service. The US Bureau of Labor Statistics provides data on the current labor force, helping you assess talent availability. Researching potential competition is also crucial; you want enough demand to sustain your business but not so much competition that it becomes difficult to gain traction.
Population trends offer additional insights. City-Data.com provides information on population growth, income ranges, education levels, and other demographics. A growing population with a skilled workforce can indicate a healthy market for expansion and hiring.
Top 10 States to Start a Business
Based on a survey of CEOs across America conducted by Chief Executive, a network for senior executives, here are the top 10 states for starting a business.
1. Texas
Texas was voted the best place to start a business in 2020 and 2021. Five of its cities—Laredo, Lubbock, Austin, Fort Worth, and Dallas—ranked in the top 20 for entrepreneurs. The state has no corporate or personal income tax, though sales tax can reach 8.25%. It saw over 490,000 new business applications in 2021. With a cost of living below the national average, a labor pool of over 14 million working adults, and an average salary of $57,382, Texas offers a favorable environment. Business registration costs for an LLC or for-profit corporation are $300.
2. Florida
Florida attracts vacationers, retirees, and young families, making it a versatile location. It has no individual income tax and a 5.5% corporate income tax, though only C corporations pay state income taxes. LLCs, sole proprietorships, and S corporations are exempt. The cost of living is slightly above the national average, but the labor force exceeds 10.5 million with an average salary of $55,833. Starting an LLC costs $100, while a limited partnership costs $965.
3. Tennessee
Tennessee offers a low cost of living, no individual income tax, and pro-business regulations. The corporate tax is 6.5%, but there are sales and use tax exemptions for equipment used in manufacturing, data centers, warehousing, and R&D. With nearly 3.5 million working adults and an average salary of $36,356, the state is investing in skilled labor through its Drive to 55 program. Registration fees range from $300 to $3,000.
4. North Carolina
North Carolina has a low corporate tax rate of 2.5%, which is being phased out to 0%. Property tax is also low at 0.91%. With over 5 million working adults, an average salary of $54,005, and a 3.4% unemployment rate, it offers a strong labor market. The cost of living is below the national average, and incorporation costs only $125.
5. Indiana
Indiana has a growing workforce of over 3.3 million adults and a 2.2% unemployment rate. Corporate tax is 4.9%, and individual income tax is 3.23%. The cost of living is well below the national average, and the median salary is around $30,000, making it affordable for hiring. Registration costs $90.
6. South Carolina
South Carolina attracted $5.7 billion in capital investments in 2021, creating 18,000 new jobs. It has invested $2 billion in port infrastructure, benefiting companies that ship products overseas. With over 2.2 million working adults, a 3.3% unemployment rate, and an average salary over $65,000, it offers a strong labor market. Corporate tax is 5%, and individual income tax is 7%. Registration costs $100.
7. Ohio
Ohio is home to several Fortune 500 companies. It has no corporate tax and a low individual income tax of up to 3.99%. With 5.7 million working adults, an average salary of $58,369, and a below-average cost of living, it provides a stable environment. Registration fees are $99.
8. Nevada
Nevada has no state corporate or individual income tax, though sales tax is 8.23%. It saw a 44.4% growth in business applications between 2019 and 2021. With 1.5 million workers earning an average of $77,000, it offers high wages. The cost of living is above average. LLC registration costs $400, and incorporation costs between $75 and $125.
9. Georgia
Atlanta is emerging as a tech hub, with startups raising nearly $2 billion in venture capital in the first half of 2021. Corporate and individual income taxes are both 5.75%. With 5 million working adults and an average salary of $50,097, it offers a substantial market. Registration costs between $125 and $225.
10. Arizona
Arizona has the second-fastest growing population in the US, with 60% of adults in the workforce. Corporate tax is 4.9%, and individual income tax is 4.5%. The cost of living is higher than average, but the average salary is $63,204. Incorporation fees start at $50 for for-profit companies.
Five Worst States to Start a Business
Strict regulations, high costs, and high taxes make these states less favorable for new ventures.
California
California ranks lowest due to high living and business expenses. Its complex regulatory landscape, including the California Consumer Privacy Act, adds compliance costs. The corporation tax rate is 8.84%, and the average sales tax is 8.82%.
New York
Financing is difficult in New York, with small business loans often under $3,000. The high cost of living further strains entrepreneurs.
Illinois
Illinois has high taxes, with Chicago’s combined sales tax around 10.12%. Unfriendly regulations and a lack of talent availability also hinder growth.
New Jersey
New Jersey ranks low in labor costs, office-space affordability, and cost of living, resulting in low small-business growth.
Washington
High living costs and burdensome regulations negatively impact Washington’s ranking, despite its strong talent pool and education system.
Regulations and taxes change frequently. Always consult with a business attorney and accountant to get expert advice tailored to your specific situation before choosing your startup’s home.
