If you're thinking about starting a business, you may have heard that some states are better locations for your company than others. Let's examine some of the factors behind these rankings and whether the state really matters.
Small Business Climate
"Austin is a wonderful, burgeoning city," says Chuck Gordon, CEO of Austin-based tech startup SpareFoot, the world's largest online marketplace for self-storage. "The creative atmosphere and a young, proactive workforce give Austin plenty of imagination and gumption to overcome its obstacles."
"Overwhelmingly, the community is very strong and supportive of entrepreneurship. It's truly an advantage to be a startup in Austin," he says.
If you want to be part of a thriving small business scene, it makes sense to locate your business where one of those scenes is.
The Silicon Valley, New York City and London are the best destinations for new businesses according to TechCrunch, a leading technology media company. TechCrunch reports that startups in these cities have a greater overall success rate, raise more money and create more jobs.
Austin comes in at No. 19 on its global list, which translates to No. 7 for cities in the United States. The other top-ranked U.S. destinations are Los Angeles, Seattle, Chicago and Boston.
But most of these cities aren't in the states that get mentioned most often as top business destinations. In fact, California tends to rank near the bottom. There are other factors to consider.
The best or worst state for your business, tax-wise, will vary depending on what type of business you're in. The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., analyzed this issue in its recent report, "Location Matters: A Comparative Analysis of State Tax Costs on Businesses."
The study looked at corporate headquarters, research and development facilities, retail stores, call centers, distribution centers, capital-intensive manufacturing and labor-intensive manufacturing. It found different best and worst states depending on the type of business, but there were some common themes. Wyoming, Nebraska, Louisiana and South Dakota each turned up more than once as having the lowest average tax burden, while Pennsylvania and Hawaii came in last in several categories. Wyoming was the overall winner, and Pennsylvania was the overall loser.
Businesses face corporate income taxes, property taxes, sales taxes, unemployment insurance taxes, capital stock taxes, inventory taxes and gross receipts taxes, the study says. These taxes vary by state and locality and affect a company's bottom line.
If you take a broader view of how regulations affect businesses, you'll get a different list of best and worst states. The top six most business-friendly states from a public policy standpoint are South Dakota, Nevada, Texas, Wyoming, South Carolina and Alabama, according to the 16th Annual Small Business Survival Index published last November. The index is produced by economist Raymond Keating of the Small Business and Entrepreneurship Council, a national, nonpartisan advocacy organization dedicated to protecting small businesses and promoting entrepreneurship.
The index reports the least-friendly locations are the District of Columbia, New York, New Jersey, Vermont, Rhode Island and California. Its rankings are based on 20 inputs including personal tax rates, corporate tax rates, property tax rates, health insurance mandates, electric utility costs and crime rates.
Does State Really Matter?
The idea that you should locate your business in a specific state is "mostly just misinformation and over-hyped marketing by the states and other parties," says Michael J. Duffy, attorney and counselor at law for Duffy Law in Cherry Hill, N.J. Duffy has advised countless clients on business organization and operations.
"Most of the perceived benefits do not apply to small business owners," he says.
For example, because of the way most small businesses are structured, they won't pay corporate tax no matter where they're located. Individual owners will pay personal income tax on the earnings of their business in their home states regardless of where it's located.
You can't run your business from a high-tax state and pretend it's in a low-tax state. The business must have a physical presence in the state.
"It's seductive for the owner of a small business to think they've discovered some loop hole and make the tricky move to domicile in a foreign state to avoid all tax and liability. States would be foolish if they allowed this, and thus of course they do not," he says.
The Bottom Line
With so many ways to choose the "best" state for your business, if there even is such a thing, how do you choose? The answer might be simpler than you think. Rather than move to the state with the most business advantages, there's a strong argument for doing nothing.
"I think the best state to start a business in is the one you are living in now. There is a huge advantage gained by starting a business where you are already connected to the community and your potential clients," says Adam S. Drake, CFA, partner and vice president of Highland Investment Advisors in Milwaukee, Wis.
If no particular state appears to offer major benefits to your business - advantages that are significant enough to uproot your entire life for - you can relax knowing that your home state might be your best bet.
More From Investopedia