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The Best and Worst States to Open a Small Business In
March 29, 2018
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The Best and Worst States to Open a Small Business In

There are many factors which lead to the success or failure of a business. Lower customer spending, economic uncertainty, and regulatory burdens can prevent small businesses from thriving. In comparison, affordable office space, favorable taxation, access to additional capital, and a qualified labor force can increase business success.

In addition to the previously mentioned factors, where you open a new business is an important element in the equation. In this post, we’ll cover the best and worst states to open and operate a small business, along with the measures used to determine the quality of the state.

7 Factors Used to Determine the Quality of the State

1. Office Space Costs
2. Accessible Financing
3. Education Level of Potential Employees
4. Business Tax Climate
5. Startup Activity
6. Labor Costs
7. Employee Availability

Businesses fail for different reasons, with the business location as a key factor. For instance, lower office rent, or retail space can reduce operating costs, and access to a qualified labor force can provide the talent needed for business expansion.

Best Five States to Open a Small Business

                State                                     Ranking

  • North Dakota                                    1/11
  • Texas                                                   2/4
  • Utah                                                    3/6
  • Oklahoma                                          4/25
  • Nebraska                                           5/22

North Dakota: This state has the highest share of new entrepreneurs, creating a good ecosystem for developing a thriving business. It has the second highest GDP, of $66,507 per capita, in the nation. However, the low unemployment rate doesn’t provide a good pool of human capital. North Dakota also has the highest average growth in the number of small businesses and ranks #1 in most accessible financing.

Texas: The Lone Star State ranked second due to major economic centers and a solid startup activity score. It also ranks fourth in the highest density for starting a business, with a modest cost of living.

Utah: When it comes to density of starting a business, Utah ranks the third highest with 93.5 startup businesses per 1,000 firm population. Access to capital and high levels of education to support business growth contributes to its high ranking.

Oklahoma: New entrepreneurs and opportunity shares are high, along with a favorable tax climate, low cost of living, and strong startup activity, pushing Oklahoma into the top five best places to start a business. However, the state struggles with employee education levels and a low business survival score, which measures the number of businesses opening compared to the number closing within a given year.

Nebraska: Due to its opportunity share of new entrepreneurs, decent startup activity score, and low cost of office space, Nebraska comes in fifth on this list. Its notable weakness is the availability of qualified employees.

Worst Five States to Open a Small Business

                State                                     Ranking

  • Hawaii                                              46/50
  • Rhode Island                                  47/20
  • Maryland                                        48/45
  • New Hampshire                            49/16
  • New Jersey                                     50/39

Hawaii: The Aloha State faces the highest cost of living in the country, which creates a challenge for small businesses. Low education levels and high labor costs account for Hawaii’s low ranking. Hawaii receives high marks for the percentage of entrepreneurs employed before starting their own business. Nearly 89 percent of entrepreneurs saw market opportunities before starting their own business, rather than due to unemployment.

Rhode Island: This state struggles with a low density and a decreasing rate of entrepreneurs, along with a high cost of living.

Maryland: Unfortunately, Maryland has a low availability of qualified workers, high labor costs, a high cost of living, and is at the has high office space rents. It ranks third in the business survival score, with more businesses closing than opening. Still, the state’s strength is in a highly educated workforce and moderate startup activity.

New Hampshire: The Granite State suffers from a low startup activity score and a high cost of living, along with ranking 49th in the availability of workers. Its strength is the business tax climate.

New Jersey: Coming in last place, New jersey has a 9 percent corporate tax rate, expensive living costs, high cost of office spaces, elevated labor costs, and charges among the most for property taxes. In addition, the state struggles with access to financing, ranking 46th out of the 50 states. On the plus side, New Jersey has a favorable GDP of $56,721 per capita and a highly educated workforce.

Conclusion

There are multiple factors used to determine whether a state is good or bad to start a business, leading to a wide range of recommendations among experts. Surveys don’t produce the same results because they measure different factors. The type of business you operate will determine which factors matter the most. Therefore, it’s important to look at the rankings along with the reason why a business might thrive or struggle in a particular state.

*The two scores reflect the results from two different assessments on the best and worst states to open a business. The first number is the ranking based on WalletHub, the second is the ranking based on Business Insider.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

BonnieAleman 1
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Bonnie specializes in writing for the financial and real estate industries, and graduated from the McIntire School of Commerce at the University of Virginia.
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