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Recruiting

The 10 best states for starting a small business

By Paola Peralta
June 9, 2023 1:02 PM
Small businesses
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There are a number of reasons a small business could fail, but instead of trying to solve for why, frustrated enterprise owners may need to be solving for where.

In an effort to help guide hopeful business leaders, financial insights website Capital on Tap conducted a new research study to determine the best and worst states for starting a small business. The study analyzed eight factors including new firm survival rates, corporate tax rates,  and the number of entrepreneurs per state to determine the viability of launching a new operation.

"Entrepreneurship is driven by the desire for independence," Damian Brychcy, chief operating officer at Capital on Tap, said in a release. "This includes the freedom to pursue your passion, choose your workplace and working hours, and foster personal growth."

Read more: Is your small business eligible for the Employee Retention Tax Credit?

According to the Bureau of Labor Statistics and Guidant Financial, about 20% of businesses fail within the first year, and 50% fail within the first five years. Forty-two percent of failed business owners said that the most common reason their venture fails is that there's no market for their product or service. 

Florida came in first due to the state's low corporate tax rate at 5.5%, which allows more money to flow back into the business. Florida also saw the most jobs created by small businesses per 1,000 residents living in the state. Texas came in second for being one of the only five states that do not levy any business tax or personal income tax. Idaho ranked third for having a 13.84% rate of new employer business actualization — which means that for every 100 business applications, nearly 14 become employers within the first two years.

"Starting a business entails significant risks, including financial, reputational and scalability risks," Brychcy said. "This research provides valuable insights when it comes to the business climate in different states to help new entrepreneurs in making informed decisions for creating a favorable environment for their business."

See which states made Capital on Tap's top 10 and where prospective small businesses owners could have the most luck in their endeavor.

Florida

When compared with all other states, Florida provides the most jobs created by startups per 1,000 residents living in the state.

Texas

Texas is the second-best state to start a business due to its small-business-friendly tax framework — all businesses with revenue less than $1.08 million, or total tax liabilities of less than $1,000, owe no franchise tax. Additionally, small businesses in Texas secured the fifth-highest average loan per employee at $4,811.

Idaho

Idaho has the eighth lowest labor cost when compared with all 50 states, in addition to seeing a high rate of new business owners transition to employer status within two years.

Nevada

New businesses in Nevada have an 83% chance of surviving past its first year. NNevada also doesn't have a corporate income tax, making the area a tax haven and drawing many organizations to plant HQ in the state.

North Carolina

North Carolina has a particularly low percentage of corporate tax at a rate of 2.5%. It also has the eighth highest percentage of firms with a chance of surviving after its first year at 82.7%.

Colorado

Colorado has a high rate of business creation, and a particularly low corporate tax rate at 4.55%.

Washington

Washington has the largest startup "early survival rate" with 89.2%; it also has the 12th lowest number of business bankruptcy filings compared to all fifty states.

Georgia

Georgia has the third highest overall rate of new entrepreneurs launching per month.

California and Montana

California and Montana are tied for ninth place. Half of California's workforce reports to a small business, and it  has the highest number of new business establishments started in one year. However, California has the tenth highest labor costs with an average hourly wage of $24.04.

Just 37 businesses filed for bankruptcy in Montana in 2022. The state ranked 11th when it comes to new businesses that make a first payroll within eight months.

Utah

Utah experiences a very low corporate tax rate of 4.85%.
Paola Peralta
Associate Editor, Employee Benefit News
Recruiting Professional development
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