The Best and Worst States to Start a Business

For many Americans, starting a business is the American dream. In Q2 2017, the U.S. economy expanded at its fastest annual rate since 2015, so now might be a great time to start a business.

Creating a successful company requires much more than just desire and passion, however. You should be aware of the steps to starting a business in your state, including getting a business license. It’s also important to know the specific business conditions in your state, ranging from the quality and number of available employees to the tax-friendliness of your location.

To help you understand which states are the best and worst to start a business, GOBankingRates looked at a number of critical factors that shape a business climate. These factors include:

• Startup Activity: The rate of new entrepreneurs in every state, the opportunity share of new entrepreneurs (those who started businesses because they saw market opportunities) and the startup density (number of startup firms per 1,000 firm population)
• Small Business Employees: The existing number of small businesses and existing number of small business employees in relation to the population — how prominent small businesses are within a state
• Survival Rate of Businesses: The ratio of businesses created versus the number of business deaths
• Productivity: The per capita real gross domestic product levels in every state
• Education Level of Potential Employees: The portion of the population that is graduating from college
• Business Tax Climate: How business-friendly the state’s tax structure is
• Cost of Living: How affordable it is to live in the state

The findings might surprise you — and maybe even inspire you. Whether you’re a recent college grad wanting to launch a startup or a retiree ready to make a big move and create a family business, click through to see the best and worst places to start a business, starting with the worst.

Wisconsin drops to the cellar on this list for 2017, down from No. 46 in 2016. This year, Wisconsin sports the lowest opportunity share of new entrepreneurs — which measures the percentage of new entrepreneurs who were not unemployed before starting their businesses — at just 66.39 percent. Wisconsin also posts the fourth-lowest rate of new entrepreneurs, a monthly average of the adult population becoming entrepreneurs, at just 0.21 percent.

Things might be picking up, however. In January 2017, the Wisconsin Economic Development Corporation awarded nearly $500,000 in grants to support entrepreneurship in the state.

Hawaii, the most isolated landmass on Earth, has a reputation as a high-cost state. In fact, Hawaii has the highest cost of living of any state, and by a wide margin. These basic living costs translate to the cost of doing business in Hawaii, as well.

Another major factor that drags down Hawaii’s overall ranking is its access to highly educated employees. The state ranks near the bottom when it comes to the percentage of its population graduating from college, at just 1.57 percent.

Rhode Island took a big tumble in this year’s rankings, falling from No. 20 in 2016. Rhode Island has one of the least favorable business tax climates, and its low number of new entrepreneurs ties with cellar-dweller Wisconsin at just 0.21 percent. The number of larger startups employing more people than just the founder and new startups overall in the state also ranked among the lowest for 2017.

Sporting a per-capita GDP among the top 10 highest in the nation doesn’t put Maryland’s entrepreneurs at an overall advantage, as the state remains one of the lowest-ranked places to start a business. Maryland ranks low across a number of factors, including its business tax climate, the rate of new entrepreneurs and especially the opportunity share of new entrepreneurs, at 73.11 percent.

Alabama gets a boost from its low cost of living, which is among the lowest in the 50 states, nearly 10 percent less than the national average. However, the business metrics for the state don’t fare nearly as well. Its startup density, opportunity rate of new entrepreneurs and number of new entrepreneurs are all near the bottom of the study. With the national average per-capita GDP at $50,577, Alabama’s $37,261 per-capita GDP also drags down the state’s ranking.

Arkansas ranks among the five states with lowest per-capita GDP, at just $36,368. On the plus side, Arkansas does register the second-lowest cost of living of any state in America. However, this is countered by a poor business tax environment, including a competitive disadvantage with neighboring states Texas and Tennessee, which have no income tax.

Louisiana scores quite well when it comes to the percentage of small business employees, at 53 percent. It also benefits from a low cost of living compared to the national average. Where it falters is in the categories of business taxes and employees’ education level.

Louisiana’s corporate tax structure, consisting of five tax brackets, is unnecessarily complicated for businesses, according to the Tax Foundation. Additionally, the state assesses a high levy on essential business components, such as leases and utilities.

New Jersey businesses benefit from a high rate of new entrepreneurs, at 0.34 percent, a high rate of new businesses created out of opportunity, at 88.03 percent, and a high per-capita GDP, at $57,084. So where does the state falter? Primarily, with taxes. The state ranks dead last in its business tax climate index, partly due to having the highest property tax rates in the U.S.

South Carolina isn’t at the very bottom in any one particular category, but struggles with several business metrics, contributing to its overall low placement. The biggest albatross around the state’s neck is its low per-capita GDP, at $37,063. The state also has a poor business survival rate and a lower number of startups.

Maine has climbed a bit from its No. 49 ranking in 2016, but it still faces challenges in creating a business-friendly atmosphere. Although the percentage of small business employees is fairly high, at 57.5 percent, the state suffers from mediocre numbers for business survival, business tax climate and cost of living.

Ohio has a booming environment for startups, with an 88.22 percent opportunity share of new entrepreneurs. However, this might be due to the decline of once-plentiful “Rust Belt” jobs. Yet, it’s an encouraging sign, along with the state’s low cost of living.

Headwinds to business lie in the state’s business tax structure, the sixth worst in the 50 states. This might help account for Ohio’s low rate of new entrepreneurs.

Minnesota shares some of the same benefits and disadvantages as Ohio when it comes to starting a business, although its scores are slightly higher. Like Ohio, Minnesota suffers from a fairly low rate of new entrepreneurs, at 0.28 percent, and it has a fairly onerous tax structure. The bright spots are its higher-than-average per-capita GDP of $53,704, a decent opportunity share for new entrepreneurs and one of the highest-educated employee pools in the country.

Connecticut offers one of the highest GDPs per capita in the country, at $64,511. This helps to offset the relatively high cost of living in the state, the sixth highest, tied with Maryland. Employers are also blessed with highly educated workers to choose from. This combination of factors could help explain the state’s high business survival rate, the fourth highest in the country.

Kentucky enjoys a decent startup density and a low cost of living. Workers and businesses don’t seem to be thriving, however, as the state’s per-capita GDP is low, at $38,985. Overall, there aren’t a lot of small businesses in Kentucky, with just 44.8 percent of the population working for a small business. This might be due to the low rate of new entrepreneurs in the state.

Boasting numerous institutions of higher education, Virginia benefits from an educated populace. Other state business benefits include a high GDP and a strong startup density. Virginia falters in its rate of new entrepreneurs and the survival rate of businesses, which drags down the state’s overall score.

Pennsylvania has several things going for it, including an educated workforce and a high GDP, but it can’t overcome its rate of new entrepreneurs, which is the lowest in the entire country. Just 0.17 percent of Pennsylvanians started a new business on a monthly basis, which makes the overall Pennsylvania business climate below average.

Vermont has one of the highest employee rates in small business, at 59.8 percent, along with a high percentage of workers available to work in a new business. The state also has a very high rate of new entrepreneurs, at 0.40 percent. These factors help counteract the negative aspects of doing business in Vermont, including a high cost of living and a less business-friendly tax structure. Such costs add to the many other hidden costs of starting your own business.

In many respects, New York is built for business. The state enjoys one of the highest GDPs in the nation, at $64,579, a good rate of new entrepreneurs and a very high startup density. Countering these benefits is the second-worst business tax climate, according to the Tax Foundation.

West Virginia has a low rate of new entrepreneurs and the absolute worst startup rate in the country. It climbed to No. 32 on the list from No. 41 last year by virtue of its decent cost of living, educated workforce and good opportunity share for new entrepreneurs. Hopefully, these factors will contribute to raising the state’s low current per-capita GDP of $36,315.

Iowa has some of the lowest startup and entrepreneurial rates in the country. It tops the charts, however, in the opportunity for new entrepreneurs, so there is much room to grow. The state also has a fairly productive and educated workforce, and the cost of living is low.

Illinois took a tumble in this year’s rankings, falling from a lofty No. 7 in 2016. Although the state still enjoys a moderate cost of living, an educated employee pool and a fairly high GDP, the state is average to below-average in its number of new businesses and small business employees.

California’s tax structure ranks the third worst in the nation for businesses, and its high cost of living falls behind only Hawaii and Washington, D.C. But this doesn’t stop the enormous economy — which would rank No. 6 in the entire world if it were its own country — from powering forward. The state is a haven for entrepreneurs, with the fifth-highest rate of new entrepreneurs and the sixth-highest startup density.

Mississippi has a fairly high rate of entrepreneurship, the ninth-highest, and it benefits from the lowest cost of living of any state in the nation. Unfortunately, its workers don’t earn enough to benefit from that low cost, as the state’s per-capita GDP is by far the lowest in the country, at $31,881.

New Mexico falls into the middle of the pack when it comes to starting a business because it scores fairly moderate across all factors. The state has a relatively business-friendly tax structure, a middle-income per-capita GDP and a decent rate of startups. Bright spots include a somewhat high rate of small business employees and a decent rate of new entrepreneurs.

Indiana has a low startup density and a low rate of entrepreneurship, and it isn’t helped by a low number of small business employees. Yet the state is business-friendly with its low cost of living and favorable tax structure.

If you’re looking to start a business in Tennessee, you’ll benefit from relatively low taxes, a low cost of living and a high opportunity share. Tennessee business owners might struggle with low labor force quality, which likely contributes to the low rate of new entrepreneurs.

Georgia receives high marks across a number of categories, including low cost of living, a high opportunity share for entrepreneurs and an overall high rate of entrepreneurship. Georgia’s main black mark is its low percentage of small business employees, which ranks among the lowest in the nation.

Massachusetts is awash in high-quality universities, and as a result its workforce is among the best educated in the country. The state also boasts the highest per-capita GDP in the country, at a whopping $65,454. Although the cost of living is high, the state’s tax structure is fairly benign, especially for such a high-income state.

New Hampshire has fairly poor scores overall for entrepreneurship, and its rate of business failures is the second highest in the nation. Yet the state ranks this high based on its favorable business tax climate and the educational quality of its available employees — tops in the nation, and by a large margin. GOBankingRates also rates New Hampshire as the No. 1 state for families to live a richer life.

Nebraska is a mixed bag when it comes to starting a new business. The state scores low in the rate of new entrepreneurs, but it has favorable taxation policies and an above-average per-capita GDP of $53,114. Nebraska shines when it comes to opportunity share of new entrepreneurs, scoring No. 3 in the country.

Kansas offers a relatively low cost of living. The rest of the picture for entrepreneurs in the state is passable. Kansas offers moderate levels of everything from its rate of new entrepreneurs — 0.30 percent — to its GDP of $46,982.

Arizona has a good rate of entrepreneurship and a high startup density. The rest of the equation tilts to the negative, with fewer highly educated employees, fewer small business employees — No. 46 — and a lower GDP — No. 44.

Having the country’s fourth-lowest cost of living helps propel Michigan into the top 20 of best states to start a business. The business tax climate is favorable, and the opportunity share of new entrepreneurs is decent. The state stumbles a bit when it comes to startup density and the rate of new entrepreneurship, however.

Delaware ties for the second-lowest rate of new entrepreneurs in the country, and its rate of small business employment is low. Yet, companies flock to incorporate in Delaware due to its tax structure, which doesn’t tax intangible assets. Coupled with the fifth-highest GDP in the nation, at $63,664, Delaware is a favorable place for doing business.

Oregon scores well across a number of business metrics, including GDP, rate of new entrepreneurs, startup density, business tax climate and percentage of employees working for small businesses. The availability and education level of employees also rank well.

Perhaps surprisingly, Idaho’s GDP of $35,466 ranks second lowest in the nation, trailing only Mississippi at $31,881. The education level of employees is also on the lower end of the scale. However, across all other metrics, the Gem State ranks moderate to high. Of particular note are the state’s sixth-place ranking in opportunity share of new entrepreneurs and 11th-place ranking for cost of living.

The only blemish on North Carolina’s business ranking is the low percentage of small business employees, at 44.8 percent. Beyond that, the state receives high marks in many categories, including low cost of living, favorable tax climate and decent rates of new entrepreneurs and startup density.

Home to such popular, multibillion-dollar brands as Amazon, Costco and Starbucks, Washington businesses have to contend with a fairly high cost of living. If you’re looking for a place to start your business, however, you can benefit from the state’s high productivity scores, with a per-capita GDP of $56,831. The state also has a high startup density.

Oklahoma might not seem to be the startup capital of America, but it actually scores highest of all in terms of new entrepreneurs. The state also ranks No. 5 for opportunity share and offers the third-lowest cost of living. Entrepreneurs might struggle with hiring, however, as the state has a low level of potential employees and a low per-capita GDP, at $44,623.

North Dakota scores well in most business metrics, including an impressive per-capita GDP of $62,837, the sixth best in the U.S. Keeping the state out of the top 10 is its low rate of business survival, the third worst in the country.

Colorado’s crisp, clean mountain air is reason enough to consider starting a business there; its above-average business environment might be enough to seal the deal. The state scores average to above-average in almost every category, including good startup metrics and a $52,795 GDP, slightly higher than the national average. A potential hurdle lies in the quality of available employees.

Missouri has a high startup rate and one of the best business survival rates in the country. Its GDP and percentage of small business employees remain low, but it offers the seventh-lowest cost of living in the country, and the lowest among the top 10 on this list.

As the saying goes: Don’t mess with Texas. It’s hard to argue with this proposition in a state with one of the country’s highest GDPs — No. 13 at $53,795 — coupled with one of the lowest cost of living rankings — No. 8. Startup density is high in Texas, and those businesses seem to thrive. It has one of the country’s highest business survival rates to go with its high rate of new entrepreneurs.

When it comes to starting businesses, Utah fires on all cylinders. The state carries the country’s third-highest startup density, along with a high opportunity share of new entrepreneurs. Perhaps most encouraging for would-be employers is the educational level of available employees, which ranks second highest in the nation.

Alaska posts the second-lowest opportunity share of new entrepreneurs — Alabama has the lowest — along with the lowest employee educational scores in the nation. Its No. 6 ranking is due to its off-the-chart performance in other areas.

Alaska has the No. 4 GDP in the country, at $63,971, and the No. 3 best tax situation in the country, due in part to its lack of state income or sales tax. The state also has a high rate of new entrepreneurs. This might be why it’s one of the top 10 most successful states in the country.

Montana combines a moderate cost of living with a favorable business tax climate and one of the highest rates of new entrepreneurs. Although its $39,356 GDP is below-average, it boasts the highest percentage of small business employees in the country, at 66 percent.

With no state income tax, Florida ranks favorably on the business taxation scale. The state’s startup density of 98.7 is also No. 2 in America. The state’s GDP of $39,543 is on the lower side, but its rate of new entrepreneurs is high.

When it comes to opening a business, Nevada excels on many levels. As with Florida, the state has no income tax, resulting in a generous tax schedule for businesses. The state is off the charts when it comes to startup density, ranking tops in the nation. Nevada also has the No. 2 countrywide opportunity share of new entrepreneurs; Iowa is No. 1 for that factor. But the state has the lowest percentage of small-company employees.

As befitting its No. 2 position, Wyoming ranks No. 1 in both business tax climate and the rate of new entrepreneurs. It owes much of its tax ranking to the fact that it has no corporate income tax. The state also enjoys a below-average cost of living, a high GDP of $58,821 and a high percentage of small business employees.

South Dakota is the turnaround story on this list, having ranked only No. 22 in 2016. A large reason for this jump is the incredible survival rate of South Dakota businesses. Its business survival rate is more than double that of No. 2-ranked survivalist, Missouri. South Dakota offers the second-best tax climate, the fourth-best small business employee percentage and the fourth-best opportunity share. All of these factors combine to make South Dakota the best state in the country to start a business.

To give yourself the best chance of success as a business owner, you need to understand what the specific business conditions are in your state. Although one negative factor alone might not be enough to derail your entrepreneurial dreams, it’s helpful to know how starting a small business in your state compares with the small business opportunities in the rest of the country.

Methodology: GOBankingRates considered the following factors to rank all 50 states on the strength of existing small businesses and startups, as well as how favorable the state’s business climate is to entrepreneurs. Data was sourced August 2017.

To measure startup activity, GOBankingRates examined three factors: (1) the opportunity share of new entrepreneurs, (2) the rate of new entrepreneurs in a given month, (3) and the density of startup businesses per 1,000 existing businesses. Startup activity data was sourced from The 2017 Kauffman Index: Startup Activity Report on State Trends. To measure business survival rate, data on the ratio of business creations to business deaths (4) was sourced from the U.S. Bureau of Labor Statistics. Productivity (5) was measured by the state’s per capita GDP in 2016, sourced from Statista. To measure labor force quality, data on the percentage of availability of employees (6) was sourced from U.S. Small Business Administration’s Office of Advocacy, and education level of potential employees (7) from the U.S. Department of Education. For business tax climate (8), rankings were based on a composite index of business taxes sourced from the Tax Foundation. Lastly, the states’ cost of living (9) was sourced from the Missouri Economic Research and Information Center.