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by Mary Girsch-Bock | Updated Aug. 5, 2022 – First published on May 18, 2022
Image source: Getty Images
Ready to quit your job and become an entrepreneur? You’re not alone. According to the United States Census Bureau, the first three quarters of 2020 yielded more than 3.2 million new business applications, with the fourth quarter not even tabulated yet.
But where you start your business can be just as important as the type of business you open. To make things easier, we looked at the best states to consider starting your small business this year. Our analysis is based on these six essential factors that small business owners must consider when starting a new business. Each factor is scored on a scale from 1-10.
Each business is different, and business owners will likely use additional indicators that are more relevant to their own individual preferences and those relevant to their specific industry.
The 10 best states to start a small business in 2021:
If you’re looking to start a small business, your location may matter more than you think. There are some locations across the U.S. that offer more advantages for new businesses, which can ultimately determine just how successful your business will be.
These are the best states for small businesses in 2021.
Total Score: 7.39
Tax Climate: 6.23
Consumer Spending in State: 4.93
Rate of New Entrepreneurs: 9.21
Business Survival Rate: 8.55
Labor Costs: 7.56
Climate: 9.37
Montana’s Department of Commerce welcomes small businesses, offering a variety of resources for new business owners. The best state to open a business in 2021, Montana scores high in several areas, including the number of new businesses calling Montana home. A five-year business survival rate of 53.4% puts the odds of success in your favor.
With a median annual income of $57,153, labor costs should be reasonable, and geographically, Montana holds little risk of natural disasters, with forest fires the major culprit in 2020.
Montana’s corporate tax climate is not as optimal as it could be, with a corporate tax rate of 6.75%, while the individual income tax rate tops out at 6.9%. Montana does not currently have a state sales tax. Consumer spending is also on the rise, going from $41.4 million in 2017 to $45.3 million in 2019, a 9.2% increase, with the state on an upward trend.
COVID-19 has also impacted Montana, with 8,107 cases per 100,000 residents as of January 12, 2021, fairly high for the region, and with cases still rising.
Total Score: 7.05
Tax Climate: 9.32
Consumer Spending in State: 5.33
Rate of New Entrepreneurs: 5.08
Business Survival Rate: 7.63
Labor Costs: 7.04
Climate: 7.72
South Dakota’s Office of Economic Development offers a Business Start-Up Packet, free to anyone interested in starting a business in South Dakota. Though the rate of new entrepreneurs is low in the state, at 290 per 100,000, those who do start a business in South Dakota will appreciate the state’s tax climate, with no corporate or individual income tax, making it one of the most tax-friendly states for small businesses.
South Dakota also enjoys freedom from some of the natural disasters that plague other states, with the only disaster declaration in 2020 being the COVID-19 outbreak, one of the worst in the country, with 11,699 cases per 100,000 residents as of January 12, 2021, though new cases are tapering off.
More than half of the businesses, 52.2%, started in South Dakota in 2015 are still around, and with a median annual household income of $59,533, new businesses should have no problem locating affordable labor. Consumer spending came in at $40,798, an increase of 3.9% from 2018, but remains low.
Total Score: 7.03
Tax Climate: 8.11
Consumer Spending in State: 6.53
Rate of New Entrepreneurs: 9.37
Business Survival Rate: 5.57
Labor Costs: 7.11
Climate: 5.21
If you’re interested in starting a business in Florida, you’re not the only one. Florida’s rate of new entrepreneurs has steadily increased over the past five years, and in any given month, 0.42% of non-business owner adults are starting their own business. Unfortunately, fewer than half of those businesses, 49.5%, will survive five years.
One reason for Florida’s entrepreneurial growth may be its attractive tax climate. According to the Tax Institute, Florida ranks No. 1 in individual income tax, with no personal income tax assessed, and it ranks No. 4 for corporate taxes, with the corporate tax rate topping out at 4.5%.
But taxes aren’t the only thing that makes Florida a good choice. Median annual income in Florida is $59,227, making labor costs affordable for startups.
On the downside, Florida has seen its fair share of disasters, mainly hurricanes. The state has also been hit hard by the COVID-19 outbreak, with 6,930 cases per 100,000 residents as of January 12, 2021, with new cases increasing again.
Total Score: 6.62
Tax Climate: 4.84
Consumer Spending in State: 6.27
Rate of New Entrepreneurs: 9.05
Business Survival Rate: 6.64
Labor Costs: 6.07
Climate: 7.98
Is everything really bigger in Texas? Apparently, the rate of new entrepreneurs is, with 410 Texans opening a new business on any given day. Even better, more than half of those new businesses, 50.9%, are expected to last five years.
Natural disasters in 2020 were limited to a couple of hurricanes and a tropical storm, although this can vary widely throughout the state. And like other states, Texas has been impacted by COVID-19, with 6,864 cases per 100,000 residents as of January 12, 2021, with new cases rising in recent weeks.
Though Texas has no corporate or personal income tax, the tax burden is fairly high, with sales tax rates coming in at a combined 8.19%.
Finding affordable labor may be slightly more difficult in Texas, which has a median annual income of $64,034. Consumer spending has also increased across the state, coming in at $40,552 in 2019, an increase of 4.4%. Consumer spending in Texas is higher than in neighboring states but still lower than many on the list.
Total Score: 6.47
Tax Climate: 4.25
Consumer Spending in State: 6.93
Rate of New Entrepreneurs: 6.67
Business Survival Rate: 6.56
Labor Costs: 6.73
Climate: 9.15
If a state free of natural disasters appeals to you, check out Idaho’s Business and Resource Wizards, which guides you through the business creation process. Frigid winters aside, Idaho is free from natural disasters, with COVID-19 the only disaster to strike Idaho in 2020, with 8,407 cases per 100,000 residents as of January 12, and with cases rising in recent weeks.
Idaho also scores a decent 0.38% rate of new entrepreneurs in the state, with a five-year survival rate of just over 50%. Personal spending was also fairly average, coming in at $37,183 in 2019, up 4.5% from 2018 totals. However, with a median annual income of $60,999, new business owners may find it difficult to locate affordable labor.
The other catch is taxes. Idaho’s tax climate is not as friendly to entrepreneurs as other locations, with the corporate income tax rate and individual income tax rate topping out at 6.925%. Idaho also lands somewhere in the middle of all states with a combined state and local tax burden standing at 9.3%.
Total Score: 6.26
Tax Climate: 5.16
Consumer Spending in State: 10.00
Rate of New Entrepreneurs: 3.89
Business Survival Rate: 5.80
Labor Costs: 3.55
Climate: 9.49
Thinking of starting a business in Utah? The state offers links to numerous new business resources for new entrepreneurs. The rate of new entrepreneurs in Utah is lower than surrounding states, with a five-year survival rate sitting at 49.8%.
Another potential sticking point is labor. With a median annual income of $75,780, affordable labor may be difficult to come by.
Fortunately, Utah saw a 5.7% increase in consumer spending between 2018 and 2019, with the majority spent on housing and utilities. With its Rocky Mountains location, the state is fairly safe from natural disasters, though wildfires and COVID-19 were problems in 2020, with the state experiencing 9,591 cases per 100,000 residents as of January 12, 2021, and new cases continuing to rise.
Utah falls somewhere in the middle on taxes, with a top corporate tax rate of 4.95%, the same as the individual income tax rate. Combined state and local taxes average 7.18%.
Total Score: 6.07
Tax Climate: 4.09
Consumer Spending in State: 6.40
Rate of New Entrepreneurs: 7.06
Business Survival Rate: 4.89
Labor Costs: 6.50
Climate: 9.61
It’s hot in Arizona, and usually dry, which sparks many of the wildfires that break out annually in the state. Luckily, that seems to be the only natural disaster that strikes Arizona with any regularity, although COVID-19 outbreaks have impacted the state, with 8,622 cases per 100,000, and new cases rising daily.
Natural disasters haven’t stopped Arizona residents from starting a business. The state sits at a new business rate of 0.33% per 100,000 residents, though fewer than half, 48.6%, remain in business after five years. New business owners may also face a lack of affordable labor, with a median annual income of $62,055.
The tax climate in Arizona is not the most welcoming to those new businesses, with a top corporate tax rate of 4.9% and a combined state and local tax burden of 8.8%.
On the plus side, consumer spending continues to rise, averaging $38,044 in 2019, an increase of 4.7% from 2018.
Total Score: 6.00
Tax Climate: 4.75
Consumer Spending in State: 6.13
Rate of New Entrepreneurs: 4.68
Business Survival Rate: 7.02
Labor Costs: 5.42
Climate: 9.04
Although Oregon’s rate of new entrepreneurs remains modest at 260 per 100,000 residents, more than half, 51.4%, of those new business owners will still be in business five years later.
One challenge new entrepreneurs will face is finding affordable labor, with Oregon’s median annual income coming in at $67,058.
That healthy annual income likely contributed to the rise in consumer spending, coming in at $43,707 in 2019, an increase of 4.5% in 2018.
Breathtaking scenery comes with a price. Oregon’s top individual tax rate comes in at a whopping 9.9%, with a total state and local tax burden of more than 10%. Business taxes are also on the higher side, with a top corporate tax rate of 7.6%, but the state has no sales tax.
Oregon also scores high on the climate scale with wildfires being the state’s only disaster in 2020. Oregon also responded well to the pandemic, with its COVID-19 outbreak limited to 3,002 cases per 100,000 residents as of January 12, 2021. Cases have been rising recently but are still low compared to other states.
Total Score: 5.96
Tax Climate: 10.00
Consumer Spending in State: 1.73
Rate of New Entrepreneurs: 9.84
Business Survival Rate: 1.45
Labor Costs: 5.87
Climate: 9.71
Looking for the best state to start a business for tax purposes? Look no further than Wyoming. Yes, it’s cold, but the small business tax climate is hot. Wyoming has neither a corporate nor a personal income tax, with the state sales tax rate topping off at 5.34%, allowing business owners to spend more money on their businesses and less in taxes.
Wyoming also scores big on the rate of new entrepreneurs it produces, with 390 per 100,000 residents starting a new business in any given month. Unfortunately, they may be facing an uphill battle as the five-year survival rate for new businesses is a lackluster 44.1%.
Labor costs can also be a factor, with a median annual income of $65,003, while consumer spending came in at $43,723 in 2019, an increase of 2.7% from 2018.
Climate-related natural disasters are typically limited to wildfires, though 2020 also brought the COVID-19 outbreak, which affected 8,189 residents per 100,000 as of January 12, 2021, and the rate of new cases is rising slightly.
Total Score: 5.94
Tax Climate: 5.84
Consumer Spending in State: 4.80
Rate of New Entrepreneurs: 7.46
Business Survival Rate: 4.05
Labor Costs: 6.24
Climate: 9.46
New businesses are on the rise in Nevada, with more than 340 residents per 100,000 becoming an entrepreneur and helping to diversify a gaming-centric economy. The new businesses are a welcome addition for the state, which has struggled to rebound from the COVID-19 outbreak with an infection rate of 8,125 per 100,000 residents as of January 12, 2021, and new cases are up slightly in recent weeks.
New entrepreneurs face an uphill battle, with the five-year business survival rate at 47.5%. Another sticking point is the lack of affordable labor, with the median annual income sitting at $63,276.
Nevada’s tax climate is attractive to new business owners, with no corporate or individual income tax, though the state sales tax tops off at around 8.23%. Other good news is that consumer spending was up 3.7% in 2019, coming in at $43,166 in 2019.
Natural disasters are at a minimum in Nevada, with wildfires and the occasional earthquake the norm. And though the southern portion of the state is hot, the northern part enjoys four seasons.
Starting a new business can invigorate local economies. Image source: Author
Below the states are ranked using six essential factors.
Hard work, dedication, and a great business idea are all needed for your business to succeed. But even with all of those things in place, outside factors such as geographic location, tax burden, and access to resources can all help determine whether your business is a success.
There’s no perfect place for all businesses, but there are a lot of good places to start your business. These 10 states are a good place to start your research.
Data regarding each listed factor for scoring was pulled from the data sources below and normalized on a scale from 0-10. Scores were determined by weighting each normalized factor and adding up to the final score listed for a final ranking on a score from 1-10. Factors were weighted as follows:
Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. She previously worked as an accountant.
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