Which States Offer the Best Tax Laws for Small Businesses?

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If you’re starting a small business, you’ll have to factor in countless variables to determine whether you’ve got a viable idea. The size of your market, the cost of production, the available labor pool and your ability to scale are just a few of the many elements you’ll have to incorporate into your business plan.

With so much going on, taxes may be one of the last considerations on your mind — but that would be a mistake. Although federal tax law applies to every business, individual states have their own taxes that can literally make or break a company that might be just starting out or running on the margins.

With that in mind, here’s a look at which states offer the best tax laws for small businesses.

Which States Have Favorable Tax Policies for Small Businesses?

According to the Tax Foundation, these are the most favorable states for small businesses:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana 
6. New Hampshire
7. Nevada
8. Utah
9. Indiana
10. North Carolina

Generally speaking, states have higher rankings because they don’t assess some of the major types of taxes that other states do. These could range from corporate income taxes or sales taxes to even personal income taxes. Those that do charge all of these taxes, such as Indiana and Utah, do so at a low rate.

How Can Favorable Tax Laws Help Your Small Business?

While taxes are a necessary part of a functioning society, mathematically speaking, they are a drag on company earnings. States that have more favorable tax laws help your business keep more of what it earns — and may even incentivize purchases from consumers.

States with no sales taxes, for example, are a boon for consumers, as they can reduce the price of a purchased item by a significant amount. For example, with limited exceptions, Alaska, Delaware, Montana, New Hampshire and Oregon charge no sales tax. If you run a small business in these states, you’re likely benefiting from increased purchases by cost-conscious consumers.

California, on the other hand, levies the highest state sales tax in the country, at 7.25%. This means that, all other things being equal, consumers in California may pay 7.25% more for the same item sold in those other states. This could be a drag on your sales if you operate in California.

Nevada, South Dakota and Wyoming are among the best states for running a small business because they have neither corporate nor personal income taxes. This means that whether you’re incorporated or a sole proprietor, there are no state taxes on your business profits. This can boost your business income by 9% or more. Alaska, Illinois, Minnesota and New Jersey all levy state corporate taxes of at least 9%, with New Jersey topping the scale at 11.5%.

If you’re a sole proprietor, personal income taxes matter more than corporate taxes because all business profits flow to your individual income tax return. In this case, your business might want to avoid states with the highest personal income taxes. California has by far the highest top income tax rate at 13.3%, but seven additional states have individual rates of at least 7%:

• Hawaii (11%)
• New York (10.9%)
• New Jersey (10.75)
• Oregon (9.9%)
• Minnesota (9.5%)
• Massachusetts (9%)
• Vermont (8.75%)
• Wisconsin (7.65%)
• Maine (7.15%)
• Washington (7%)

Which States Should You Avoid If You’re Running a Small Business?

Obviously, business can be successfully conducted in any state. However, some put up higher hurdles in terms of tax policies that can make it harder to generate a profit. The Tax Foundation lists these states as the most unfavorable for businesses from a tax perspective: 

1. Alabama
2. Rhode Island
3. Hawaii
4. Vermont
5. Minnesota
6. Maryland
7. Connecticut
8. California
9. New York
10. New Jersey

Bear in mind that these states may very well offer other advantages that can outweigh the effects of taxation on small businesses, from a wealthier populace to more plentiful consumers who need what you sell. 

The Bottom Line

Taxes are not the only factor you should consider when developing your business strategy, but they can weigh heavily on your company’s profitability. Different taxes apply to different types of businesses, so you should analyze whether corporate, personal or sales taxes will have the greatest effect on your company. Because these can be complicated calculations, consider speaking with a tax advisor to find the best solutions for your business. 

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