Choosing the best state to start a business is an important detail in your overall business plan. When it comes to launching a small business, “Location, location, location” is part of the formula for success. If you’re wondering if a specific location would give your startup an extra advantage over the competition, you should check out WalletHub’s latest report on 2018’s Best & Worst States to Start a Business.
With a bad location ranked as one of the top reasons for business failure, choosing where to launch your business can be almost as important as choosing what business to start. In this post, we’ll look at the top states for startups based on WalletHub’s survey, and share expert insights on what to look for in an ideal location.
Best and Worst States for Startups
In this study, WalletHub compared all 50 states across 25 key indicators of startup success to determine the best environments to launch and grow a small business. The three key dimensions were 1) business environment, 2) access to resources and 3) business costs. Then each dimension was evaluated using 25 relevant metrics, including the average growth in the number of small businesses, the average first-year survival rate, ease of access to resources for businesses, the area’s cost of living, corporate taxes and other factors.
Based on overall rank, the top 10 states to start a small business are:
- North Dakota
Top states for highest average growth:
- North Dakota
Top states for accessible financing:
- North Dakota
- South Dakota
Top states for low labor costs:
- West Virginia
Top states for the highest availability of human capital:
- West Virginia
- New Mexico
Ready to Launch? Here’s What to Consider
While studies like this one from WalletHub can give you a head start on identifying potential locations for your business, you should also do your own research before making a decision. Look into the business incentives available in a state, the state’s small business regulations, and your industry’s presence in a state before you pack up and move.
What should you consider when deciding whether to move to a different state to start your business? Both federal and state policies and regulations regarding small businesses make a difference. “Wealth and business opportunities are less anchored to geography than they have ever been,” says Peter Lorenzi, professor of management at the Sellinger School of Business at Loyola University Maryland, one of the business experts that WalletHub consulted for the survey.
Looking at the type of entrepreneurial education a state or city’s schools and colleges offer can be one way to assess a location. When K-12 schools and colleges are involved in promoting entrepreneurship, it provides opportunities for your business to tap into the expertise of the school’s faculty, students and alumni, mentorship programs and more.
When it comes to tax incentives, the research is not conclusive, according to Drew Hession-Kunz, Finance Faculty at Carroll School of Management at Boston College. “We all respond to incentives,” he says, noting that states like Illinois, Connecticut, Iowa and New Jersey that have raised taxes on individuals or businesses “are seeing significant out-migration.” However, Hession-Kunz believes that overall, “tax breaks and incentives generally appear to come out poorly for the state and the taxpayers.” Instead of looking for state tax incentives, he suggests businesses will do better to look for a state that is well-run and fiscally responsible in the long term.
“Tax savings and incentives are only a part of the decision-making process,” agrees Al Danto, lecturer at Rice University. Although he notes that “capital is the lifeblood and fuel of a growing business,” companies should also consider the availability of an adequate workforce, transportation and other factors when making a location decision.
If you’re surprised by a few of the top states ranked, you shouldn’t be. “The usual hubs are expensive to hire and grow in, and so people are looking elsewhere to put limited and expensive capital to work,” explains Hession-Kunz. He notes the spread of startup culture, the affordability of technology, and the availability of venture capital in locations outside Silicon Valley have made it possible for startups to succeed in more places.
One place you may not want to consider: Hawaii. According to WalletHub, the Aloha state is the worst state in which to start a business in 2018. Hawaii ranked dead last in access to resources and availability of human capital. At the same time, it has the nation’s highest cost of living and some of the highest labor costs in the country. Though, yes, it is beautiful.
Uncle Sam’s Influence
How do national measures impact the ideal business location? WalletHub’s panel of experts disagreed as to how the economic policies of the current administration, including tax reform legislation, will promote new-business development.
On the plus side, Danto believes the administration’s economic policy strategy has been targeted to get more capital in the hands of entrepreneurs and businesses, and encourage them to spend it. “When the corporate tax rate was cut from 35 percent to 21 percent, it in effect gave businesses a 14 percent increase in cash flow in one fell swoop,” he says.
However, Paul A. Pavlou, Ph.D., believes most of the tax cuts primarily help large corporations rather than startups or small businesses. “Lower taxes is not a primary consideration for startups that are generally not profitable [enough] for a few years to pay taxes,” explains Pavlou, who is senior associate dean, Milton F. Stauffer Professor, Co-Director, Data Science Institute, at Fox School of Business, Temple University.
Pavlou also noted that the attempt to ease regulations will be more help to established corporations than to startups. “The policy to make it difficult for foreign labor, particularly in high-tech [industries], to work in the United States, could make it difficult for startups to recruit talent,” he explained, “particularly given the tight labor market in the technology sector.”
Craig Saper, former Bearman Foundation Chair in Entrepreneurship at the University of Maryland in Baltimore County, believes the policies of the current administration benefit established businesses more than new ones “that depend on research, innovation, and an educated population.” Instead of looking for tax breaks, he contends, startup business owners should look for locations that have solid infrastructure, walkable cities, strong educational institutions, and public-private partnerships to help drive innovation. “That’s where young workers especially want to be located,” he notes.
Make the Right Choice
Choosing the best state to start a business requires assessing a variety of factors. Develop a list of your “must haves” and “nice-to-haves” so you can create your own ranking of locations. Read other surveys, use social media to talk to business owners and contact places like the local chamber of commerce, economic development agency, Small Business Development Center or SCORE office in the areas you’re considering. And of course, listen to your gut. By taking these steps, you’re sure to make the right choice for your new business.