You’ve thought about what you’re going to sell or make. You’ve thought about how you’re going fund your business. You’ve thought about how you want to run your business. But have you thought about where you want to start your business?
Though many don’t put much thought into their start-up location on the state level when putting together a business plan, the state in which a person chooses to found their business can have an enormous effect on its success or failure.
Small businesses are the backbone of the American economy. Approximately 50 percent of U.S. citizens are employed by companies with fewer than 500 employees. Of the businesses registered in the States, over 90 percent of them have four or fewer employees. Together, small businesses bring in about 40 percent of all business revenue in America.
Now, states have no control over whether or not they possess a valuable natural resource. Large, infrastructure-intensive industries are difficult for states to lure away from one another, as it’s often complicated and costly for them to move. But small businesses? Small businesses are mobile. Small businesses are lucrative. Small businesses are money in the State’s coffers.
The competition between states to attract and keep entrepreneurs and small business owners is fierce, and, in the battle for small business, the weapon of choice is legislation. States make themselves attractive to entrepreneurs by finessing things like their tax rates, their environmental regulations, and state-wide education and training programs. So, for those budding entrepreneurs who are not afraid to relocate, or who are just lucky to have picked a great location, here are the five most small business-friendly states in the U.S.A.
5. South Dakota
South Dakota makes itself attractive to small business owners by basically offering to leave them alone. The state boasts the third-lowest level of state taxation in the U.S., collecting neither individual nor corporate taxes. South Dakota’s 4% sales tax rate is one of the lowest to be found in America. In order to ease the burden on employers, the state has also set relatively few health insurance mandates. This is good for employers as there are fewer benefits they are required by the state to provide. Bundled together with a low crime rate and the second lowest unemployment rate in the U.S., it’s easy to see how South Dakota could be considered a startup haven.
There are some potential downsides to this lack of interference. While it might seem nice to be left alone by the state government, business owners shouldn’t expect help or handouts if the going gets tough. Despite a sizable increase in state spending over the last five years, the government of South Dakota spends very little per capita on its citizens.
There’s also the issue of financial stability. Though South Dakota’s big industries are oil and gas, which seem like they should be consistent performers, a large portion of the states revenues actually come from the Federal government. This means state funding could get iffy should there be a shakeup at the Federal level.
Texas consistently rates well with everyone from Forbes to the Kauffman Foundation’s yearly national small business survey. Much like South Dakota, Texas’ approach is hands off. The state collects no personal state income tax, corporate tax, capital gains tax, or taxes on interest or dividends.
In addition to a complete lack of these four taxes which many states take as a given, Texas boasts low unemployment tax, workers compensation premiums, gas tax, and diesel tax, cutting down on what could be major expenses for a small business. In a more qualitative than quantitative measure, small business owners rate the state highly, calling it friendly and welcoming to startups and permissive when it comes to zoning and environmental regulations.
Strikes against Texas include a high property tax rate and a relatively high crime rate. While small business owners rate basic labour as very easy to find, they say that training and networking programs that would turn those workers into skilled labour just aren’t there. That probably has something to do with the fact that while Texas has one of the lower rates of per capita government spending, it also has one of the highest rates of per capita debt. Texas may not want to tax, but that means it doesn’t have much to send back to those who need it.
There’s a reason that Virginia is experiencing a massive tech boom. The tech industry is one of the most mobile, and therefore serves as a good indicator for how effectively and aggressively a state caters to small business. Virginia has held up better than many states against the 2008 recession, due in large part to a massive influx of Federal funds. This stability has allowed Virginia to continue offering low gas, wireless, workers compensation and unemployment tax rates.
Despite the influx of cash, Virginia has only modestly increased state spending; per capita government spending is relatively low. The state has passed right to work legislation, which does correlate availability of basic labour.
Of the challenges that small business owners face in Virginia, they’ve rated environmental concerns and zoning issues as the stickiest. Compared to other states, however, Virginians still make out like bandits. The state has an aggressive incentive strategy for the industries it’s trying to capture. Virginia has instituted financing authorities for small business as well as establishing industry zones in the state.
Similar to Texas, the greatest drawback to Virginia is its dependence on Federal funds. With talk of sequestration and cutting back on spending, it’s possible the low tax rates and incentive programs that make Virginia such an amazing state for business could very well suffer.
Much of Nevada’s attraction as a small business bastion is due to that City of Sin, Las Vegas. The income provided by the gambling industry is considerable and, as such, Nevada doesn’t depend on the Federal government for as significant a portion of its revenue as other states. The consistent cash flow also allows Nevada to stay competitive. Like Texas, Nevada has no personal state income tax, no corporate tax, no capital gains tax, and no dividends or interest tax rate. The state has low workers compensation costs for employers and low infrastructure costs for things like wireless service. The government infrastructure of Nevada is also quite small and government spending is modest.
Though casinos can be as lucrative as the oil and gas industry, they are sensitive to wider economic trends. In times of recession or economic uncertainty, casinos suffer from reduced patronage. Again, like Texas, Nevada has low per capita government spending and high per capita debt. Small business owners also report high hiring and labour costs.
Utah? It does seem like the last place to be a leader in the small business economy. But it is. Utah boasts low utility costs, few health insurance mandates, and low overall workers compensation contribution. In many of the metrics by which states are judged for their accommodation of small businesses, Utah runs about a third of the way up.
But, though they don’t stand out like Texas or Nevada for taking a stand against taxations, Utah doesn’t suffer from problems like high debt ratios, and funding problems. The Utah economy has expanded on average 2% a year, which makes it the fourth-fastest growing economy in the U.S. Small business owners in the state are effusive about what Utah has to offer, boasting a friendly environment, good regulation and zoning, and a streamlined system that makes it easy for someone just starting out. The state routinely gets an A+ rating from local small business owners.
You have to live in Utah.