The best states to start a business

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The best states to start a business

Different states have different weather, accents, and culture—and they also have different opportunities for entrepreneurs. Some states have educated workforces that excel in creating new ideas. Some states are natural resource powerhouses that produce energy or agriculture.

We looked at two studies to figure out the best states to start your next business. First, we’ll find out which states have the highest rate of new businesses and patent creation. These states are innovation hubs popular with startups. Second, we’ll look at the states with the lowest taxes for businesses owners. These states are your best choice if your business is location independent. Let’s dive in.

The best states for entrepreneurs

New ideas and new businesses drive growth. U.S. News and World Report looked at the best state business environments across the country by looking at two factors: The percentage of new businesses created, and the number of new patents per million residents of the state.

By measuring both the creation of new ideas (patents) and new businesses, this ranking takes a snapshot of where new opportunities are being created in America. The states with the most aggressive business growth are:

  1. California

  2. Massachusetts

  3. Idaho

  4. Colorado

  5. Utah

  6. Florida

  7. Nevada

  8. Delaware

  9. Washington

  10. Arizona

Why is California number one?

California has the highest patent creation rate in the country. Given that Silicon Valley is home to Google, Facebook, Apple, and other major tech companies, this is not particularly surprising. It also is number four in the rankings of new business creation. These factors combine to make the Golden State the nation’s top business environment.

Massachusetts is just behind California in patent creation, but is only eleventh in the nation for new business creation. Still, those two factors are enough to give the Bay state the nation’s second best business environment.

Idaho, at number three, is a surprise given it is not traditionally viewed as a hub of job creation or new ideas. Yet, Idaho has the nation’s third-best new business creation rate, and ranks eighth in patent creation. Two other western states, Colorado and Utah, round out the top five with strong showings in both new business and patent creation.

The importance of people

California and Massachusetts are high tax states with high costs of living and a comparatively challenging regulatory environment. So why do they top the rankings for best business environment? The answer is people.

States like California and Massachusetts benefit from a well-educated workforce and nearby population centers. This gives businesses in those states a large talent pool to hire from, and a large customer base to sell to. If you’re opening a business that depends on local talent, these factors probably trump your state’s tax environment.

The most tax-friendly states to start a business

But, there’s another angle to look at this question. If you have a business that can be run from anywhere—and you don’t care where you live—then other factors come into play. In that case you’re really just trying to minimize your business and personal tax burden.

According to the Tax Foundation, the states with the best business tax climate are:

  1. Wyoming

  2. South Dakota

  3. Alaska

  4. Florida

  5. Nevada

  6. Montana

  7. New Hampshire

  8. Indiana

  9. Utah

  10. Oregon

What does a favorable tax climate look like?

States without personal or corporate income taxes do well in this ranking. Wyoming not only has no corporate income tax, but also has no individual income tax. This results in massive savings for a Wyoming corporation when compared to, say, a New Jersey corporation. Wyoming also has a very low state sales tax of 4%, which makes goods more affordable for customers and businesses. South Dakota, at number two, also has no corporate or individual state income tax, but has a sales tax slightly higher than Wyoming’s.

Although the other states in the top five each have different tax systems, they all have one thing in common—no state income tax. Given that California has a top rate of 13.3%, a successful business owner could realize significant savings by moving to a no-tax state like Wyoming or Florida.

The importance of a 0% state income tax

But why does the individual income tax have such an important effect on the best places to start a business? It’s because the owners of many small businesses and partnerships pay taxes on income from their businesses on their individual income tax return. Thus, a 0% state income tax is, for many, basically a 0% state business income tax.

The Puerto Rico loophole

Of course, if you are truly mobile, you could consider the massive savings of setting up your business in Puerto Rico, a US territory with a 4% corporate tax rate. If your business involves investing, things get even better there. With the right paperwork filed, you may only pay a 0% capital gains tax.

Where should you start your business?

So, where should you start your business? That choice is up to you, but it’s hard not to envy Florida and Nevada. Florida has the nation’s highest rate of new business creation and a 0% state income tax. Nevada has no state income tax while ranking second in the nation for new business creation. In some ways, these states offer the best of both worlds—low taxes and high levels of entrepreneurship.

Best states to start a business
State Number of Patents Granted (2015) Business Tax Personal Income Tax
California 43,609 8.84% 13.30%
Massachussets 7,234 8.00% 5.10%
Idaho 909 7.40% 7.40%
Colorado 3,472 4.63% 4.63%
Utah 1,595 5.00% 5%
Florida 4,913 5.50% 0%
Nevada 789 0% 0%
Delaware 376 8.70% 6.60%
Washington 7,038 0% 0%
Arizona 2,741 4.90% 4.54%
Wyoming 114 0% 0%
South Dakota 128 0% 0%
Alaska 46 9.40% 0%
Montana 168 6.75% 6.90%
New Hampshire 924 8.20% 5.00%
Indiana 2,278 6.25% 3.23%
Oregon 2,796 7.60% 9.90%

But taxes aren’t the only thing that matters. If you’re trying to build a biotech startup, Silicon Valley or Boston will likely be more attractive markets than South Dakota, even though the Mount Rushmore State has lower business taxes. It will be much harder to find venture capital funding and top talent outside of major research areas. But, if you’re starting an online business, it’s hard to argue with the logic of setting it up in a low tax state.

Ultimately, the best state for your new business depends on what kind of business you are building, and what it will take to make it successful.