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Many Americans dream of starting a business and — despite recent economic downturns — they continue to pursue this dream more than ever. In fact, the number of new business establishments in the U.S. has reached levels not seen since before the financial crisis. So, it seems now might be a great time to launch a company.
But, starting a business is a daunting pursuit, and doing it successfully means you need an idea of how well your state caters to new businesses and startups. In other words: You need to understand your state's business ecosystem.
"Ecosystem is a useful metaphor for evaluating areas of business," said Stewart Thornhill, executive director of the Zell Lurie Institute for Entrepreneurial Studies at the University of Michigan. "For instance, it’s hard to say any one factor makes a rain forest a rain forest. But if you take away one critical factor, it can undo the whole thing — in much the same way business systems work."
To find out which states are the best and worst to start a business, GOBankingRates.com looked at these critical factors that shape business ecosystems and how they affect aspiring entrepreneurs' chances of success:
- Startup Activity (based on the rate of new entrepreneurs, opportunity share of new entrepreneurs and density of startups)
- Business Survival Rates (based on the ratio of business creations to deaths)
- Productivity (based on per capita GDP)
- Availability of Employees
- Education Level of Potential Employees
- Business Tax Climates
- Cost of Living
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 states to start a business, starting with the worst.
A state's cost of living is a major factor when considering the location for opening a business, said Thornhill. And in Hawaii, the top challenge that entrepreneurs face is high costs, as this state has the highest cost of living in the U.S.
Also, many new businesses will have to work with a potential employee education level — the percentage of the state's population graduating from college — that ranks toward the bottom of the 50 states. These factors put Hawaii in first place for the worst states to start a business.
On the positive side, however, Hawaii ranks high in its opportunity share of new entrepreneurs, which measures the percent of new entrepreneurs who were not unemployed before starting their businesses. This measurement approximates the percentage of new entrepreneurs who started businesses because they saw market opportunities; in this case, nearly 89 percent of new entrepreneurs did this in Hawaii.
Where opportunity share of new entrepreneurs helped Hawaii, it hurts Maine. Whether there is a cause-effect relationship between that and Maine's low density of startups is debatable, but the state also puts up low productivity numbers: Its $37,958 GDP per capita is the seventh lowest in the country.
Starting a small business in Vermont comes with high costs but not many employees available to hire. With roughly 11,000 Vermont adults unemployed and about 3,000 jobs open, only 1.29 percent of the working population is available to work at a new business. In comparison, the best state has more than double — or 2.73 percent — employees available for an entrepreneurial business.
More bad news: Vermont has the second-lowest density of startup businesses with only a little under 54 new businesses per 1,000 firm population.
If you're starting a business in Arkansas, its low cost of living will be a boon. In most other areas, however, starting a small business in this state might be tough.
The potential employee education level ranks toward the bottom, and the population's GDP per capita is $37,644, which is the sixth lowest in the country. Arkansas' business tax environment isn't the best either, having a poor corporate tax rate and notably not defining corporate income the same way as the federal government, according to the Tax Foundation.
Opening a small business in Wisconsin comes with some roadblocks. First off, Wisconsin has the second-lowest rate of new entrepreneurs — the percent of the adult population becoming entrepreneurs, a monthly average — at 0.19 percent.
The low rate of new entrepreneurs might be tied to the low opportunity share of new entrepreneurs, with only 74.19 percent — the third lowest in the nation — of new business owners who were not unemployed before starting their businesses. These factors contribute to Wisconsin having the second-worst startup activity score on our list.
Maryland’s startup activity score is far better than Wisconsin’s, but other factors important to new business owners hurt the state’s chances of ranking higher.
A small percentage of workers are available for new businesses, and high living costs might deter entrepreneurs from starting a business in Maryland. Plus, this state also suffers from more business deaths than business births, scoring the third-worst business survival score.
44. South Carolina
Mediocre numbers across a variety of business-related factors hold South Carolina back from ranking higher. The state's startup score is low, as is the rate of business survival. And although new businesses have a larger pool of workers available to hire than most states, South Carolina suffers from the third-lowest GDP per capita, $36,174, severely hurting its productivity score.
Despite growing metro areas like Louisville, Kentucky doesn't provide one of the best places to open a new business. And although the state boasts a relatively cheap cost of living, its productivity score lags behind four-fifths of the nation. There also seems to be less market opportunity for entrepreneurs to start a business in Kentucky than in other states.
Like Kentucky, Alabama is a state with a low cost of living — this factor doesn't prevent the state from ranking among the 10 worst states to start a business.
Key factors that really undermine Alabama as a good state to start a business: poor startup activity and poor productivity. Alabama has the lowest opportunity share of new entrepreneurs at 66.45 percent.
Combined with a low rate of new entrepreneurs and thin density of startups, Alabama has the worst startup activity score in our study. Further damaging, Alabama possesses the fifth-lowest GDP per capita in the U.S.
41. West Virginia
The startup activity in West Virginia doesn’t bode well for people wanting to start a business. This state has the lowest density of startup businesses at 51.1 startup firms per 1,000 firm population. It also has the third-lowest percent of its population becoming entrepreneurs compared to the rest of the country.
Potential employees' education levels are above-average in West Virginia, as is the percent of employees available to work for new businesses. Unfortunately, businesses close at a higher rate than they get created in West Virginia, and the state's low per capita GDP further undercuts its chances of ranking higher in this study.
New small business owners can benefit from the cheap cost of living in Georgia. But the trouble for entrepreneurs, among many things, is the state's poor showing in potential hires' education levels. Less than half of Georgia's college students graduate, and just 2.04 percent of the state's population have finished college with a degree.
On the positive side, Georgia has a higher density of startups than most states, which could bode well for starting a business.
39. New Jersey
New Jersey possesses a number of good incentives to start a business — but also a major deterrent. On the plus side, the state scores well for productivity thanks to its $56,721 per capita GDP. Business opportunity seems to favor entrepreneurs in New Jersey more than in other states.
With living costs that rank among the most expensive in the nation, however, New Jersey comes in low on our list. But it's really businesses taxes that bring the Garden State down, ranking worst in that category. Property taxes in New Jersey are some of the highest in the U.S., and the state's 9 percent corporate income tax is notably high as well.
If you're looking to save money on living costs, Tennessee offers new business owners a relatively low cost of living. But a cheap cost of living can't save Tennessee from poor labor force quality, productivity and startup activity scores.
Similar to Tennessee, adults in Minnesota are not flocking to entrepreneurship in large numbers. The market opportunity share of new entrepreneurs is lower compared to most states. And thanks to low startup density, Minnesota is tied for the sixth-worst startup activity score in the country.
But it's not all bad news for Minnesota. For new companies looking to hire, the state sports a high education level of potential employees, as well as a per capita GDP that outranks nearly 80 percent of the U.S.
Ohio is part of the “Rust Belt,” a region in the U.S. that used to house much of the country’s heavy industry before the loss of manufacturing jobs. Economies in the “Rust Belt” declined, but maybe because of this, Ohio's economic ecosystem seems to provide a great market new businesses: Ohio ranked No. 2 for opportunity share of new entrepreneurs.
People starting a business in Ohio will also enjoy an affordable cost of living. However, many remaining factors undermine this state's place as a haven to start a business. There are very few startup businesses per existing business, and the business tax climate is not too conducive to business interests.
The business tax climate in Mississippi is only a little better than Ohio's. But the cost of living in this state, the lowest cost of living in the nation, can definitely help when starting a business.
In terms of hiring people for a new business, Mississippi has a higher percentage of available employees than most states, but lacks when it comes to potential employees’ education levels. Another negative for aspiring entrepreneurs in Mississippi: It has the country’s lowest per capita GDP at $31,894.
Like Mississippi, Idaho's per capita GDP damages this state's position as one of the best states to start a business. The education level and the availability of employees are both on the low end in Idaho, too.
But, two factors buoy Idaho’s place on our list. The state boasts the third-cheapest cost of living and the sixth-best opportunity share of new entrepreneurs in the U.S.
Entrepreneurs starting a business in Kansas can look forward to the nation’s sixth-lowest cost of living. Beyond that, however, new business owners could run into trouble. The low density of startup businesses and middling rate of new entrepreneurs doesn’t bode well for prospecting entrepreneurs.
On the negative side of things, productivity could be an issue because Michigan's per capita GDP falls below the national average. This state also has a relatively low density of startups. But, there are other signs that the state is heading in the right direction. For instance, Michigan's largest city Detroit has reemerged as a real hot spot for new businesses, said Thornhill.
"Conditions are right for starting a company," he said. "Real estate is cheap, there's access to exporting and shipping, and there's a strong university system."
Plus, Michigan has a couple of key factors that can help potential entrepreneurs: a low cost of living and a favorable business tax climate.
Pennsylvania has some notable positive factors that are weighed down by major flaws in the state's startup activity. For people starting a business, Pennsylvania scored well in the potential employees' education levels and availability of employees categories.
In other areas, however, Pennsylvania comes up short. The state has the lowest rate of new entrepreneurs in the nation, with only 0.18 percent of the adult population pursuing entrepreneurship in a given month. Pennsylvania also scores low for opportunity share of new entrepreneurs compared to the rest of the country. These factors combine to give this state one of the worst startup activity scores on the list.
In Louisiana, there seems to be opportunity for starting a new business, as many people have turned to entrepreneurship. There's also a substantial supply of employees available to work at a potential new startup business.
But, potential employees' education level and business taxes hurt Louisiana's position among the best states to start a business. This state's corporate income tax is broken up into five brackets, according to the Tax Foundation, which can create uneconomical conditions for companies. Plus, the state has a heavy sales tax on essential business components, such as utilities and leases.
Arizona is a pretty mixed bag when it comes to starting a business. The state's per capita GDP ranks in the bottom half of the country. This state's poor numbers in education levels of possible employees pull it down into the bottom five for that category, as well.
On the other end of the spectrum, Arizona's large availability of employees could be a benefit to small business owners. The state's high density of startups also could indicate fertile ground for a potential enterprise.
28. New York
Like Arizona, New York's density of startup businesses is relatively high as well. Also, productivity isn't a problem for the state's population, as New York reports the fourth-highest per capita GDP at $63,929 in the nation.
Other factors that bode well for starting a business are New York's better-than-average numbers for the opportunity share of new entrepreneurs and the rate of new entrepreneurs.
Entrepreneurs can find many good reasons to start a business in California. Unfortunately, new business owners will have to face some major costs.
California burdens entrepreneurs with the nation's second-highest cost of living, behind only Hawaii. Worse news for people looking to start a company: The business tax climate in California ranks the third-worst in the U.S.
But it's not all bad news for small business owners in the Golden State. California holds the No. 4 position for the highest rate of new entrepreneurs and No. 6 for density of startups in the U.S.
26. South Dakota
South Dakota's decent rate of new entrepreneurs and opportunity share of new entrepreneurs is good news for startups. Even better news: South Dakota takes the No. 2 spot for the best business tax climate.
However, there's a reason why South Dakota isn't higher up our list of the best states to start a business: The pool of potential workers to hire is small in the state. In fact, South Dakota has the lowest percentage of available employees at 0.52 percent as well as the worst employee availability score.
South Dakota’s decent rate of new entrepreneurs and opportunity share of new entrepreneurs is good news for startups. Even better news: South Dakota takes the No. 2 spot for the best business tax climate.
Oklahoma scores well in startup activity, posting the third-highest rate of new entrepreneurs. However, there are some obstacles to starting a business in this Southern state.
Factors that don’t bode well for people starting a business include the nation’s fourth-worst business survival score and a potential employee education level that falls in the bottom 10 among states. Luckily, entrepreneurs can take solace knowing Oklahoma has the fourth-lowest cost of living in the country.
Iowa ties for the lowest rate of new entrepreneurs and has very few startups per established businesses.
There are some signs, however, that this state could be favorable to starting a business. The cost of living in Iowa is on the cheaper side, and potential employees' education level ranks in the top 10 among states. And, the opportunity share of new entrepreneurs in Iowa is among the highest in the nation.
23. New Mexico
Startup activity in New Mexico is just average, but entrepreneurs will like the state's cheaper-than-average cost of living.
Productivity might be an issue, however, as New Mexico has a per capita GDP nearly $7,000 below the national average. But, the wide availability of possible employees balances this lagging productivity, bringing New Mexico in at No. 23.
Nebraska has a mediocre startup activity score, but that hides the fact Nebraska has the third-highest opportunity share of new entrepreneurs in the nation. But these new business owners might have a tough time hiring: This state has the third-lowest percentage of available employees in the U.S.
On the surface, Indiana's business ecosystem doesn’t look conducive to starting a new company. The state ties for the fourth-lowest rate of new entrepreneurs and has an equally low opportunity share of new entrepreneurs. Plus, Indiana comes in with one of the worst startup activity scores in the country — but it does redeem itself.
Boasting the nation’s second-lowest cost of living score, Indiana is good enough to rank No. 21 of the best states to start a business.
20. Rhode Island
A low startup density and a low rate of new entrepreneurs hurt Rhode Island's startup activity score. However, this tiny states seems to have room for new businesses, ranking in the top 10 among states with the highest opportunity share of new entrepreneurs.
If you're planning to start a business in Washington — which is home to many successful, billion-dollar business such as Amazon and Starbucks — you could be on rough ground. Washington has the lowest business survival rate.
But, this state has many factors entrepreneurs will like. With the fourth-highest percentage of available employees and a solid productivity score, Washington ranks among the top 20 best states to start a business.
Colorado provides a good ecosystem for starting a business, with a top 10 startup activity score, as well as an above-average per capita GDP.
Where Colorado is lacking is in the availability and education level of possible employees to hire. However, more businesses are created than closed in this state, which is a good sign for aspiring entrepreneurs.
There are plenty of good reasons to start a business in Montana. The opportunity share of new entrepreneurs is solid, but the rate of new entrepreneurs is even better — in fact, it’s the highest in the U.S. These factors combine for the second-best startup activity score in the country. Not to mention, Montana’s excellent business survival score is the third-best in the U.S.
16. New Hampshire
Entrepreneurs might be concerned with New Hampshire's poor startup activity score and what it suggests for their fortunes. However, this state fares well when it comes to its business tax climate and quality of possible employees
In a recent GOBankingRates.com study, New Hampshire ranked as the No. 1 state for families to live a richer life — which is important to remember if you're thinking about starting a business. After all, when you're assessing a location to see if it's a good fit for a new business, you need to think about where people want to live, "such as where good school systems are so young entrepreneurial communities want to keep their kids there," said Thornhill.
Unlike New Hampshire, Massachusetts scores average in the business tax climate category. And, its startup activity score isn't great.
But, Massachusetts offers other benefits for aspiring business owners. The state has a very high per capita GDP ($62,918), which bodes well for productivity. Plus, it boasts the nation's third-highest education level of potential employees.
Oregon seems to be a state that's on fire, with Portland becoming a hotbed for businesses and one of many American cities where home prices are skyrocketing. Perhaps it's no coincidence that Oregon has an above-average density of startups and ties for the 10th-best business survival rate.
The state also scores well in the availability and education level of employees, as well as the business tax climate categories.
13. North Carolina
Similar to Oregon, North Carolina also is home to up-and-coming business centers, notably in Asheville and Durham-Chapel Hill-Winston, said Thornhill.
North Carolina owes its high position as one of the best states to start a business to solid numbers across nearly all factors. Its rate of new entrepreneurs, opportunity share of new entrepreneurs and density of startups are all above average.
In more good news, the state's business survival rate ranks among the nation's 10 best. And, starting a business can be a little easier with North Carolina's relatively cheaper cost of living.
The high cost of living in Connecticut might get some entrepreneurs down, and business taxes aren't too friendly either. But, there are some factors that make Connecticut one of the best states to start a business.
For example, entrepreneurs in Connecticut have a good supply of available employees with solid education levels to choose from. The state's productivity score is excellent, with Connecticut having the third-highest per capita GDP ($64,115). And, the state boasts the fourth-best business survival rate score in the nation.
11. North Dakota
Small business opportunities seem plentiful in North Dakota, considering the state has the highest opportunity share of new entrepreneurs in the U.S. The relatively high density of startups also indicates a good ecosystem for starting a business.
And if that weren't enough, North Dakota posts the nation's second-highest per capita GDP at $66,507. But beware: North Dakota also has the second-lowest percentage of available employees.
Florida really shines when it comes to startup activity. It hosts more than 100 startup firms per 1,000 firm population, the second-highest density of startup businesses in the U.S. Plus, the state sports an excellent business tax climate, which includes no individual income tax. Plus, Florida also has a rate of new entrepreneurs that ranks among the top best.
All of these factors considered, Florida nabs the No. 10 spot of the best states to start a business.
Taking the No. 9 position of the best states to start a business is Virginia. Entrepreneurs can find potential employees with high education levels in Virginia, and this state has a better-than-average opportunity share of new entrepreneurs.
But Virginia's most impressive statistic for people starting a business is its business survival rate. Virginia has the highest ratio of business creations to business deaths with nearly double the amount of establishments born to those that closed.
Like Virginia, business survival is a strong area for Missouri; it has the fifth-highest rate of business creations to deaths in the U.S.
Startup activity in Missouri bodes well for entrepreneurs, as well. In fact, Missouri has the fifth-highest density of startups. Another positive factor for people starting a business in Missouri is the affordable cost of living.
Don't let Illinois' low rate of new entrepreneurs discourage you; the state offers many positive factors for entrepreneurs. For example, the state's per capita GDP is above the national average, the cost of living is on the lower end, and aspiring entrepreneurs have a wide pool of potential employees they can pull from to hire.
Utah has the third-highest density of startup businesses at 93.5 startup businesses per 1,000 firm population. Another huge benefit for entrepreneurs is potential employees' education level in Utah — it's the second-highest in the U.S.
Breaking into the top five best states to start a business is Delaware. The market opportunity share of new entrepreneurs is favorable, and the state's business tax climate is better than most states.
A key factor, however, in making Delaware a great place for new business owners is its high productivity score; this state has the fifth-highest per capita GDP in the nation.
Home to a vast energy industry — and possibly the next housing bubble — Texas provides fertile ground for opening a business. Along with California and Massachusetts, it's one of the few states to have multiple clusters of major economic centers rather than just one or two, said Thornhill.
If you're looking to start a business in the Lone Star State, you'll be pleased to know Texas has a strong startup activity score. It ties for the fourth-highest rate of new entrepreneurs and also has the fourth-highest density of startup businesses. Plus, the cost of living here most likely won't hurt your wallet.
Economic conditions strongly point to Nevada as one of the best states to start a business. The state’s startup activity score is the best in the U.S. And, Nevada tops the charts for the highest density of startups with more than 100 startup companies per 1,000 firm population.
Lastly, entrepreneurs will enjoy the highest percentage of available employees in the country.
If you're looking to start a business and don't mind the cold, Alaska could be a good fit. Despite the fact Alaska has 10 tax brackets for corporate income tax, according to the Tax Foundation, the business tax climate in Alaska is the third best in the U.S., especially since there's no individual income tax or state sales tax.
Although Alaska scores the second-lowest opportunity share of new entrepreneurs, it has the second-highest rate of new entrepreneurs. The state also tops the charts with the highest per capita GDP and the second-highest percentage of available employees.
There is one snag people starting a business should be aware of: Alaska has the worst level of education for potential employees in the country. Fortunately, Alaska's positives more than make up for this.
Wyoming is the best state to start a business for a variety of reasons.
For starters, Wyoming's business tax climate is conducive to starting a business. The state doesn't have a corporate income tax, individual income tax or gross receipts tax, according to the Tax Foundation. And, Wyoming's sales tax rate is favorable, ranking in the top 25 percent of states for best sales tax.
Business taxes aren't the only benefit to starting a business in Wyoming. The state ties for the fourth-highest rate of new entrepreneurs. And along with a high opportunity share of new entrepreneurs and a strong startup activity score, Wyoming has a great record of business survival. The ratio of businesses being created to those closing down is 1.61.
With all these positive factors combined, Wyoming deservedly tops our list of the best states to start a business.
Keep Reading: How Much Money You Need to Live Comfortably in Your City
Methodology: GOBankingRates considered nine 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 2016.
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 2016 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 2015, sourced from the U.S. Bureau of Economic Analysis. To measure labor force quality, data on the percentage of availability of employees (6) was sourced from DirectEmployers.org, 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.