The Best States to Start a Business

The Best States to Start a Business

by Stephanie Morrow, December 2009

Almost every entrepreneur has heard the estate adage that the three things that matter most are "location, location, location." Location can make or break a budding company---which is why each year the National Policy Research Council (NPRC) lists the top states in which to start and grow a company. The NPRC is a Washington, D.C.-based organization that measures business formation and business growth nationwide.

The NPRC rankings identify places that have had the strongest record of creating new businesses and adding employees to existing companies over the last 14 years. To identify the growth areas, NPRC drew on data containing more than 100 indicators on virtually all companies operating in the United States-- over 17 million businesses in total. Each state is assigned a numerical score in each category, and given an aggregate score. Less is more: the lower a state's total score, the friendlier it is to small business.

Arizona and New Jersey Top Ranking

The NPRC deemed Arizona as 2005's friendliest state for new business. It's not surprising, in that metropolitan areas in Arizona have been flooded with up-and-coming businesses. Not only was Phoenix on top of the rankings for large cities, but Tucson was rated second amongst midsize cities, in addition to being one of the hottest real estate markets in the country.

With an annual statewide population growth of more than 200,000 people, businesses are flocking to the Grand Canyon state. Arizona also provides a favorable tax environment to businesses. Not only does the state impose no corporate franchise tax; business inventories are exempt from property tax. In addition, parent companies located in Arizona do not pay any state income tax on dividends from controlled subsidiaries in other states. Add in low labor and real estate costs, and Arizona becomes very appealing to upstart business owners.

On the opposite end of the country is the number two state in which to start a business,
New Jersey. But, don't let the state's small geographic square footage fool you. New Jersey holds the highest population density of any U.S. state and the highest household income. The customer-base is condensed, large and has money to spend. The state also houses first-rate colleges, such as Princeton University, spouting highly-educated potential employees. New Jersey's strongly developed land, sea and air facilities make it extremely attractive for transportation service firms. Finally, its proximity to New York City and Philadelphia allows businesses to utilize two of the country's richest markets.

Rounding Out the Top Five

Adjacent to New Jersey, America's "first state" placed third on the list. Delaware has been called the "Corporate Capital" because so many corporations have incorporated in the state. Delaware has consistently been in the forefront with respect to corporate law, with the Delaware General Corporation Law giving great flexibility to corporations to manage their affairs. For these reasons, Delaware is considered to have the most business-friendly legal system in the United States, attracting a large number of public and private companies to incorporate in Delaware.

A close neighbor to Delaware, Virginia also made the top five. Virginia entrepreneurs benefit from a strong Department of Business Assistance and its Virginia Small Business Financing Authority Division, which features about a half-dozen lending programs for businesses in the state. Virginia's competitive corporate income tax and sales tax are only part of this state's growing corporate appeal. Their corporate tax structure means you'll avoid the pitfalls of sales tax pyramids and maintain a low excise tax rate.

If the northeast isn't ideal for a business owner, Alabama rounded out the top five places to start a business. Alabama has continuously implemented pro-business legislation and policy designed to encourage industry growth and profitability. In addition, Alabama is regularly competitive for its amount of new business start-ups, business vitality, and low cost of operating expenses, such as taxes, energy and labor.

What to Look for in a Business-FriendlyState

There is no one aspect of a state that makes it business-friendly; it can be a combination of many things, from education and population growth, to infrastructure, climate and overall quality of life. There are many ways to evaluate how "business-friendly" a state is to your particular company.

Various state taxes, such as tax on personal income, property, sales, and capital gains, are important to research, in addition to operating costs such as electricity and labor. Specific state laws also vary from state-to-state. Right-to-work states, such as Alabama, protect business owners from labor unions enforcing strikes.

In addition to the items listed above, it's important to make sure you understand the basic factors that are important to your particular business. What are the demographics of a location? Make sure it is similar to your target market and customers. Investigate the area's labor type to see if it fits your needs.

If you are a high-technology business, for example, look for areas with potential employees in that expertise, such as the "Triangle region" of North Carolina or the "SiliconeValley" in California. Also, pay attention to your competitors - if there are many similar businesses gathering in a particular region, it may be beneficial to research that region further.

With careful research into the benefits in a business-friendly state can offer, you can maximize your potential for entrepreneurial success. It pays to consider your location, first and foremost.