The number of businesses being formed is rising, as entrepreneurial spirit grows across America amid the Great Resignation. In 2021, the US Census Bureau recorded~5.4m applications to start a business — a 53% jump from 2019 and the most of any year on record.
And the pace hasn’t slowed: In just June 2022, nearly a half million business applications were filed.
But where are folks opening up shop? And more importantly, where should you start a business to get the best benefits for your company?
Every state has its own tax rules, business regulations, and consumer needs — so choosing the right home to launch your startup can save you a ton of headaches down the road.
Factors that determine the best state to start a business
Where you live now
You don’t have to register your business in the state you live in. The “home state” is where you register the company, but you can operate it in another state.
“Companies that do business in multiple states often have to register in multiple states,” says Deryck Jordan, managing attorney at Jordan Counsel. “The first step is initial registration of the company in any of the 50 states. Afterward, the company must be registered (sometimes called qualification of a foreign company) in other states where the company does business.”
According to Jordan, the best state for initial registration is often the state where the business has its main physical presence or where the founders reside, for three reasons:
- Qualifying a foreign company in another state involves time and expense, which can negate the potential advantages of initial qualification in the first state. For example, registering your business in a low tax state but paying a $600 foreign corporation fee and filing an extra annual report every year.
- Business owners might have an easier time operating their business bank account at the same bank where they have their personal accounts.
- Business owners might be more familiar with their home state’s tax requirements, or have preexisting relationships with accountants or tax advisers who can guide them on these matters.
It can be tougher to operate in states with stricter business regulations. For example, some states have stringent licensing laws, zoning requirements, hiring policies, and health, safety, and environmental regulations.
Onerous licensing regulations can prevent you from even getting started. California, for instance, requires different licenses to cultivate, manufacture, distribute, and sell CBD.
This adds to your expenses, especially if you have to reapply for licenses annually. The states with the strictest business license compliance are:
Now that living with covid is the “new norm,” understanding state regulations for compliance during outbreaks is vital. Here are the states (or districts) with the most covid restrictions:
- District of Columbia
States like New Jersey and Pennsylvania have high corporate taxes, making it an expensive place to start a business. On the other hand, states like Texas and Wyoming don’t have any corporate taxes. So look into each state’s:
- Corporate tax
- Individual income tax
- Sales tax
- Property tax
An overview of corporate income tax by state:
Cost of living and expenses
It’s not just about where you plant your business — your living costs also add to your expenses. For example, California and New York are known for their pricey real estate and standard of living. And some states may be more expensive to do business in than others.
According to Nellie Akalp, CEO of business filing service CorpNet, first-time entrepreneurs should consider the following costs:
- Formation fees: Usually a one-time deal, costs can range between $100 to several thousand dollars depending on the state.
- Annual compliance fees: Some states require yearly filings for licenses and certificates.
- Investor appeal: Not an expense per se, but it can hurt your ability to raise funds from venture capitalists if your state has unfavorable business laws.
Other business expenses may include equipment, inventory, and delivery fees. Many business expenses are tax deductible, which can be helpful if you live in a high tax state.
As you’re browsing for a home base for your business, consider the state’s workforce and whether there’s a healthy market for your product or service.
You can get an overview of a state’s current labor force through the US Bureau of Labor Statistics. Then, research potential competition (ideally there aren’t too many businesses like yours locally, but enough to show there’s a demand).
Also, look at the population of the city and surrounding areas, and whether it’s growing, declining, or stable; City-Data.com offers excellent insights on population, income range, education levels, and other demographics.
10 best states to start a business in
Finding the best state can be highly subjective depending on your business needs. However, Chief Executive, a network for senior execs, surveyed CEOs across America to get their opinions.
Here is a top 10 list based on their data.
Texas was voted the best place to start a business in 2020 and 2021, with five of its cities ranking top 20 as excellent locations for entrepreneurs:
- Loredo (#1)
- Lubbock (#3)
- Austin (#8)
- Fort Worth (#9)
- Dallas (#14)
The Lone Star State has no corporate or personal income tax, though their sales tax rate can go up to 8.25%. It’s seen an influx of startups — there were over 490k new business applications in 2021 — and its cost of living is below the national average.
The Sunshine State is a popular destination for vacationers, retirees, and young families — making it a great location for many companies. There’s no individual income tax and a 5.5% corporate income tax.
Only some business structures must pay state income taxes, such as C corporations. However, if you set up your company as an LLC, sole proprietor, or S corporation, you’re exempt from income tax.
Starting a business in Florida will cost you $100 for an LLC and $965 for a limited partnership.
Tennessee has a low cost of living, no individual income tax, a strong infrastructure, and pro-business regulations. The state corporate tax is 6.5%, but there are sales and use tax exemptions for equipment and machinery used in manufacturing, data centers, warehousing, and research and development.
There are nearly 3.5m working adults in the state with an average salary of $36,356 — and its share of skilled labor is growing. Its Drive to 55 program aims to equip 55% of its residents with a college degree or certificate by 2025.
But if you’re interested in registering a business here, the fees are higher than usual — somewhere between $300 and $3k.
4. North Carolina
The state already boasts a low corporate tax rate of 2.5%, which it’s gradually phasing out to 0%. And it has a meager property tax rate of 0.91% — great news if your business plans to own a lot of real estate.
There are over 5m working adults with an average salary of $54,005 and a 3.4% unemployment rate. The cost of living is lower than the national average, and it only takes $125 to incorporate your company.
Indiana has a growing population (and workforce), with over 3.3m working adults and a 2.2% unemployment rate. It also has business-friendly taxes — corporations pay 4.9%, while the individual income tax rate is 3.23%.
To register a company in Indiana, you’ll have to pay a $90 filing fee.
6. South Carolina
In 2021, South Carolina attracted $5.7B in capital investments while creating 18k new jobs. It has also invested $2B in port infrastructure in recent years — handy if your company needs to ship products overseas. The state has a history of exporting to major economies like Germany and China.
Even though the state’s average salary is over $65k, its cost of living is comparatively low, making it an attractive place for employees. There are over 2.2m working adults and a 3.3% unemployment rate.
Home to Fortune 500 companies like Kroger, Macy’s, and Procter & Gamble, Ohio has no corporate tax and a low individual income tax of up to 3.99%.
Nevada is a good landing spot for more than just casinos. There’s no state corporate tax and no individual income tax, though it has a sales tax of 8.23%. The state saw a 44.4% growth in annual business applications between 2019 and 2021, and its consumer spending is consistently on the rise.
The cost of living here is above average, and its 1.5m workers earn comparatively higher wages at $77k. The fee to start a business in Nevada depends on your formation. An LLC costs $400 and between $75 and $125 to incorporate.
The state’s capital, Atlanta, is emerging as a tech hub; startups in Georgia pulled in nearly $2B in venture capital during the first half of 2021.
Georgia’s taxes are relatively high compared to others in the top 10. Business owners have to pay 5.75% for corporate tax and 5.75% for individual income tax. But there’s a working population of 5m+ people, and the average salary is $50,097.
To register a business in Georgia, it’ll cost between $125 (domestic) and $225 (foreign).
Arizona has the second-fastest growing population in the US, and 60% of its adults participate in the workforce. The tax policies here are also lower than most, sitting at 4.9% for corporations and 4.5% for individuals.
Five worst states to start a business in
A combination of strict business regulations, high living and business costs, and/or high taxes make these states unfriendly to new ventures, according to the same Chief Executive report.
California is ranked #1 for its pricey living and business expenses. The state also has a complex, ever-changing regulatory landscape, which makes it tough for small businesses to keep up. For example, the California Consumer Privacy Act of 2018 requires companies to take specific steps to protect consumer data it collects — a potentially expensive task for a startup.
Baruch Labunski, CEO at Rank Secure, an SEO agency, incorporated his business in California because he lives there. He points out that the state’s disadvantages include a 8.84% corporation tax rate and an average sales tax rate of 8.82%.
Other worst states to start a business include:
- New York: Financing in New York isn’t easily accessible — small business loans have a low value of less than $3k per company. And the cost of living is high for entrepreneurs.
- Illinois: High taxes is one reason this state ranked low 11 years in a row (e.g., the combined sales tax in Chicago is ~10.12% ). It also has unfriendly business regulations and a lack of talent availability.
- New Jersey: This state ranks low in key areas such as labor costs, office-space affordability, and cost of living. Perhaps unsurprisingly, small-business growth here is low.
- Washington: High cost of living and burdensome regulations sank the Evergreen State’s ranking. Even its top talent pool and education system doesn’t make it compelling to CEOs.
Keep in mind that business regulations and taxes can change from year to year, so always research and consult with a business attorney and accountant to get expert advice before choosing your startup’s home.