The Best and Worst States to Start a New Business

by Saleha Jogiyat

The Swyft Filings New Business Index (NBI) is a brand new, state-by-state analysis of 11 factors, and hundreds of data points to evaluate and compare the entrepreneurial environment of every state in the U.S. This is not a list of the “best” and “worst” states to live or work in, but a guide to provide aspiring entrepreneurs and business owners with extra insight to plan accordingly.

The factors we looked at are business survival rates, privacy considerations, filing fees and procedures, tax rates, administrative burdens, cost of living, employment rates, access to capital, new businesses per capita, educational quality, and leading industry trends all influence a new small business’s success.

NBI rates each state across these factors, then weights that score against the national average. At the bottom of the rankings table below you can read more about the methodology and sources from which we compiled our data.

Using proprietary data culled from our database of more than 150,000 small businesses we have worked with, the NBI invents two new benchmarks: Entrepreneurial Zeal is the percentage of residents in a state motivated to form businesses (essentially formations per capita). Trend Leaders measure how specific industries rank against other industries in the state by measuring participation level, which is then weighted against that industry’s national growth.

The NBI finds that the best states for starting a new business are Texas ranked #1, followed by Oklahoma, Virginia, Ohio, and Michigan. The worst state for starting a new business is Hawaii, then Nevada, Rhode Island, Oregon, and Idaho. Surprisingly, California despite having the largest state economy in the U.S., ranked #33.

Some other takeaways from the report included:

  • Consistency is key. Generally, a business will fare better in states that do well across multiple categories versus those that excel in just one.
  • Retail is growing in almost every state. This could be explained by the rise of online shopping, but the distinction merits future analysis.
  • Do not underestimate cost of living. All five states ranked lowest on the NBI were in the top 15 most expensive states to live. Three of those states were in the top five for highest cost of living. Clearly the cost of living significantly impacts a state’s business environment.
  • Taxes are not everything. While lower taxes generally mean a higher rank, performing well on other factors alleviates the impact.

Filing Factors

Filing Fees
Derived using public information from multiple sources. Fees include how much it costs to file an LLC or corporation, annual fees are for an LLC or corporation, and any additional fees associated with filing in a state.

Admin Burden
Public information using multiple sources, analyzing filing costs, steps required in filing, the complexity of filing, late fees, and requirements and fees associated with initial reports.

Privacy and Disclosures
Analyzed what information each state requires to be disclosed, including member or director emails, addresses, phone numbers, and other personal information.

Entrepreneurial Factors

Entrepreneurial Zeal
This ranking comes from Swyft Filing’s proprietary data. Entrepreneurial zeal refers to the percentage of residents in a state motivated to form businesses. In essence, this is formations per capita. This ranking indicates the overall climate and mindset regarding starting a business in each state.

Trend Leaders
Using proprietary data, this factor measures each state’s participation level in an industry weighted against that industry’s national growth. We identify states that are industry leaders in a broad cross-section of major U.S. industries.

Survival Rate
Pulling from public information, including the Kaufman Indicators of Entrepreneurship, this data shows the percentage of businesses that survive their first year in each state.

Financial Factors

Access to Capital
Using public information and The Council for Community and Economic Research, we measured each state for access to working capital, including tax incentives, grant incentives, and loan participation programs for new businesses in each state.

Tax Rates
Compiled public information from multiple sources to determine corporate tax rates, sales tax rates, and personal tax rates in each state.

Average Cost of Living
From public information, including the Missouri Economic Research and Information Center. The measures included in the average cost of living data are the following key indicators: cost of groceries, housing, utilities, transportation, health, and miscellaneous living expenses.

Workforce Factors

Employment Rates
High unemployment indicates a bad economy and a resulting reduced buying power. Low unemployment can mean higher labor costs and a potential shortage of labor. From public information on employment rates from public information, including the Bureau of Labor Statistics.

Education Rates
This measurement looks at the quality of education in a state and how many people attain higher education. From public information and a variety of sources, including the WalletHub Study of most and least educated states in America.

Travis Crabtree is the president of Swyft Filings. Swyft Filings works with entrepreneurs in every state, helping them navigate and automate the business filing process. When starting a new business, understanding the relative strengths and weaknesses of the state you file in can be advantageous and illuminating.

States stock photo by NicoElNino/Shutterstock

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