New entrepreneurs can start a business in practically any state they choose, but each state offers advantages and disadvantages to business owners, sometimes in surprising ways. If you want your business to have the best overall chance of success, you’ll want to choose a state that’s favorable to you, but is there truly a “best” state in which to start a business?
How States Treat Structures Differently
We can start answering this question by examining how states treat business structures differently. When you create an LLC or corporation, you’ll be subject to laws, rules, and restrictions associated with that state. For example, starting an LLC in Delaware is different than starting an LLC in Montana.
You can note the differences in the following categories:
- Taxes. Most states have a unique corporate income tax rate, and some apply a fixed tax rate to LLCs. Some states have unique tax advantages or perks associated with starting a business in that state, to incentivize more entrepreneurship.
- Liability. For the most part, liability works the same for businesses of the same type, no matter where you’ve started them. However, different states may offer varying levels of protection for LLCs or corporations based on local rules.
- Fees. Some states, instead of having a tax rate for LLCs, instead impose a flat, recurring fee for keeping the business alive. For example, you might pay $300 a year to keep it active, or you might pay nothing—it all depends on the state.
- Annual reports and paperwork. States also frequently have specific demands for annual reports, especially for LLCs and corporations. Some states require you to submit a specifically formatted annual report (and/or other paperwork) at regular intervals, while others may be more lenient with the paperwork required.
- Incentives. States may also individually offer unique perks or incentives for entrepreneurs to start a business in their territory. For example, you might have access to a lower tax rate if you meet certain requirements, or you may have more grants and loans available to you.
Starting a Business in Another State
It is possible to structure a business in a state other than the one in which you live, but it isn’t always advantageous. For example, in some cases, you may end up paying taxes both in your home state and in the state in which your business is incorporated, or you may be forced to comply with the regulations of two different states. Consider the pros and cons of operating a business in another state, and all things equal, lean toward the state in which you plan to reside.
Other Factors to Consider
There are some other factors you should consider when planning where to start your business, such as:
- Startup activity. Some states simply have more startup activity than others, resulting in a feedback loop that attracts more entrepreneurs and keeps that local economy thriving. Generally, states with high entrepreneurship rates are more favorable to new entrepreneurs; there tends to be a better environment for mutual support.
- Overall survival rates. You can also look up survival rates for new businesses in a given area. Some will have a much higher rate of success due to local conditions. This shouldn’t be the only factor you consider, clearly, since you could always be the exception to the rule, but it could help sway you in a tough decision.
- Economic productivity. How does the state’s economic growth rate compare to the national rate? Generally speaking, a state with a higher rate of economic growth will have more opportunities for entrepreneurs in practically all industries, and at all levels. Again, your mileage may vary.
- Employee options. It’s also worth looking at the available talent in a given state (and in the big cities within those states). States with good higher education opportunities tend to have better-educated and more skilled employees available for higher. That said, they also tend to demand higher salaries, so you’ll have to strike a balance here.
- Cost of living. If you plan to reside in the state in which you’re forming your business, you should also consider the cost of living. If you make twice as much money but pay three times as much in everyday costs, it may not be worth the move.
Is There Truly a “Best” State?
As of 2018, some of the commonly cited “best” states include New Hampshire, Massachusetts, Wyoming, Nebraska, and South Dakota, but you’ll find different answers depending on which sources you review, and of course, your individual priorities and preferences should influence your decision.
Accordingly, there’s no such thing as a true “best” state in which to start a business, but some states will be more favorable for your business than others. Do your research before you finalize your decision, and make sure to take all these factors into consideration.