- Studies show that location matters when you're starting or running a small or midsize business.
- Thumbtack took its annual survey of SMB owners amid the COVID-19 pandemic, and its results reflected unique disruptions.
- Motley Fool analysts also rated the best states for SMBs based on tax climate, consumer spending, rate of new entrepreneurs, business survival rate, labor costs and climate change effects.
- This article is for aspiring entrepreneurs, small and midsize business owners, and anyone else looking for the best state to set up shop.
If you have a new small or midsize business (SMB), several key factors can immediately impact its success. One of the most critical decisions a fledgling SMB owner can make is where to set up shop. Location matters – and studies show that location can determine how easily you can get your business off the ground.
We'll explore the results of Thumbtack's annual Small Business Friendliness Survey, as well as a Motley Fool analysis of how critical factors can affect business success in different states.
Tip: No matter what state you operate in, make sure you're familiar with federal and state labor laws and compliance requirements.
Thumbtack's annual Small Business Friendliness survey
In its most recent Small Business Friendliness Survey, Thumbtack polled more than 3,600 SMB owners throughout the country to determine how easy or difficult it was for them to start and run a business in their home states and cities. Participants answered more than 40 questions on topics such as local tax codes, licensing regulations, and the ease of finding workers.
Since Thumbtack took this survey in 2021 amid pandemic challenges, the results differed significantly from its 2019 survey. In 2019, the economy was "in the midst of the longest economic expansionary period in U.S. history," according to Andrew Heritage, lead economist for Thumbtack. As Heritage pointed out, "Business owners in 2021 were a year removed from one of the briefest yet most steep economic declines in modern history."
Did you know? The best states for small business taxes include Wyoming, South Dakota and Alaska. The worst states include New York, New Jersey and California.
Pandemic-related SMB challenges affected nearly every aspect of running a business in 2021. The Thumbtack survey reflects business owners' frustration and desire for support, but also optimism.
"Our survey found the disruptions caused by COVID-19 posed challenges to small business owners, and small business owners are looking to local, state and the federal government to provide additional support," Heritage said. "[Of the respondents,] 54% want state government to streamline regulatory and licensing requirements, 45% want the federal government to lower or simplify taxes, and 41% want their local government to make housing more affordable."
There's reason to hope that pandemic-induced challenges will dissipate. "Fundamentally, the public health crisis caused by COVID-19 is the cause of current economic disruptions," Heritage said. "Once resolved, challenges such as the labor shortage, inflation and supply chain disruptions should ease."
There are signs that the business climate is bouncing back. The Census Bureau's Business Formation Statistics show that entrepreneurship is at an all-time high.
Though Thumbtack's survey respondents faced significant disruptions, they are also optimistic: 87% of respondents believe there's enough economic opportunity in their communities to succeed, up 11% from the previous survey. They are so optimistic, in fact, that 42% are making plans to invest in their business in the first quarter of 2022.
Did you know? Business incubators are economic programs that support new businesses' success by providing office space as well as professional services and advice.
Thumbtack's best and worst states
The most recent Thumbtack survey's best- and worst-ranked states differed significantly from the 2019 survey. The results reflect each area's temporary pandemic regulations more than their support for small businesses in general.
According to the Thumbtack survey, here are the top friendliest states for small businesses:
- Maine (A+)
- New Hampshire (A+)
- South Carolina (A+)
- Florida (A)
- Georgia (A-)
- Kentucky (A-)
- Maryland (A-)
- Arkansas (B+)
- Hawaii (B)
- Texas (B)
- Washington (B)
Here are the top SMB-friendly cities:
- Jacksonville, Florida (A+)
- Salt Lake City, Utah (A+)
- Baltimore, Maryland (A)
- Orlando, Florida (A)
- Dallas, Texas (A-)
- Fort Lauderdale, Florida (A-)
- Seattle, Washington (A-)
- West Palm Beach, Florida (A-)
- Atlanta, Georgia (B+)
- Houston, Texas (B)
- New York, New York (B)
These are the worst states in terms of SMB friendliness:
- Indiana (D+)
- Kansas (D+)
- Mississippi (D+)
- Illinois (D+)
- Colorado (D+)
- Missouri (D)
- Wisconsin (D)
- Iowa (D)
- Delaware (D)
- Pennsylvania (F)
- Oregon (F)
- Minnesota (F)
- Michigan (F)
These are the bottom cities for small businesses:
- Providence, Rhode Island (D+)
- New Orleans, Louisiana (D+)
- Las Vegas, Nevada (D+)
- San Antonio, Texas (D)
- Portland, Oregon (D)
- Minneapolis, Minnesota (D)
- Nashville, Tennessee (F)
- Kansas City, Kansas (F)
- Detroit, Michigan (F)
Did you know? Your industry and product may determine how favorable a particular area is for your business. For example, a fishing charter company could be a successful business in Florida, while a music production company should consider starting out in Nashville.
The Motley Fool's state rankings
While the Thumbtack survey asked small business owners their opinions on their states' and communities' friendliness, The Motley Fool's analysis approached the question differently.
Analysts looked at several studies by government entities and nonprofit organizations to give each state a score based on six factors: tax climate, consumer spending, rate of new entrepreneurs, business survival rate, labor costs and the effect of climate change.
The Motley Fool came up with the following ranking of the top 10 states for small businesses.
- Montana: Montana has an excellent rate of new entrepreneurs, a good business survival rate, relatively low labor costs and negligible climate change effects. However, consumer spending is low.
- South Dakota: South Dakota has a favorable tax climate, relatively low labor costs, strong business survival rates and low climate change effects. However, there aren't many new entrepreneurs, and consumer spending is low.
- Florida: Florida has an excellent new entrepreneurship rate and good tax climate, but its business survival rate is mediocre, and the state shows increased risk from climate change.
- Texas: Texas reports a high rate of new entrepreneurs, a good business survival rate and low risk from climate disasters. However, there are high taxes and somewhat high labor costs.
- Idaho: Idaho is not at much risk from climate change, and its consumer spending, rate of new business formation, survival rate and labor costs are all reasonably good. A high tax burden – with combined state and local taxes clocking in at more than 9% – is one of the downsides.
- Utah: Utah scored a perfect 10 in consumer spending and a 9.49 on effects of climate change. Tax climate and business survival rate are middling, but the rate of new entrepreneurs and labor costs are fairly low.
- Arizona: While Arizona has minimal effects from climate change and a relatively high rate of business openings, its tax rate and business survival rates are on the low side.
- Oregon: Oregon doesn't have a lot of new businesses opening, but those that do open have a good chance of surviving. These businesses are not as vulnerable to climate change, and labor costs are in the middle. The biggest drawback here is high taxes, which exceed 10% for state and local combined.
- Wyoming: Wyoming got a perfect score on taxes, with no corporate or personal income tax, and a sales tax of only 5.34%. It doesn't suffer much from climate change problems. However, its consumer spending and business survival rate are abysmally low.
- Nevada: Nevada has plenty of new businesses opening, but a below-average survival rate. Its businesses are reasonably protected from climate change, and its consumer spending is on the low side. There is no corporate or individual income tax, but sales tax is somewhat high at 8.23%.
Did you know? The states with the fastest-growing small businesses include Mississippi, Nebraska, Maine and Texas.
Both analyses agree that Florida and Texas are favorable environments for business creation. If you are thinking about opening a new business and need a location, take these factors into account and consider which are most important to you. For example, if you are self-employed and opening a sole proprietorship or consultancy, labor costs may not be crucial.
When choosing where to open a business, also consider where you'd like to live and prepare for retirement.
Jennifer Dublino contributed to the writing and reporting in this article.