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The number of businesses being formed is rising, as entrepreneurial spirit grows across America amid the Great Resignation. In 2021, the US Census Bureau recorded to start a business — a 53% jump from 2019 and the most of any year on record. 

And the pace hasn’t slowed: In just June 2022, nearly a were filed. 

But where are folks opening up shop? And more importantly, where should you start a business to get the best benefits for your company?

Every state has its own tax rules, business regulations, and consumer needs — so choosing the right home to launch your startup can save you a ton of headaches down the road. 

Factors that determine the best state to start a business

Where you live now

You don’t have to register your business in the state you live in. The “home state” is where you register the company, but you can operate it in another state. 

“Companies that do business in multiple states often have to register in multiple states,” says Deryck Jordan, managing attorney at Jordan Counsel. “The first step is initial registration of the company in any of the 50 states. Afterward, the company must be registered (sometimes called qualification of a foreign company) in other states where the company does business.”

According to Jordan, the best state for initial registration is often the state where the business has its main physical presence or where the founders reside, for three reasons:

1. Qualifying a foreign company in another state involves time and expense, which can negate the potential advantages of initial qualification in the first state. For example, registering your business in a low tax state but paying a $600 foreign corporation fee and filing an extra annual report every year.
2. Business owners might have an easier time operating their business bank account at the same bank where they have their personal accounts.
3. Business owners might be more familiar with their home state’s tax requirements, or have preexisting relationships with accountants or tax advisers who can guide them on these matters.

Business regulations

It can be tougher to operate in states with stricter business regulations. For example, some states have stringent licensing laws, zoning requirements, hiring policies, and health, safety, and environmental regulations. 

Onerous licensing regulations can prevent you from even getting started. California, for instance, to cultivate, manufacture, distribute, and sell CBD. 

This adds to your expenses, especially if you have to reapply for licenses annually. The states with the are:

• Alabama
• California
• Florida
• Virginia
• Tennessee

Now that living with covid is the “new norm,” understanding state regulations for compliance during outbreaks is vital. Here are the states (or districts) with the :

• Virginia
• Vermont
• District of Columbia
• Hawaii
• California

Tax climate 

States like New Jersey and Pennsylvania have high corporate taxes, making it an expensive place to start a business. On the other hand, states like Texas and Wyoming don’t have any corporate taxes. So look into each state’s:

• Corporate tax
• Individual income tax
• Sales tax
• Property tax

While calculating taxes can be more complicated in some states than others, there are tools you can use to make this process simple. For example, if you want to , use OnPay’s tool.

An overview of corporate income tax by state:

Cost of living and expenses

It’s not just about where you plant your business — your living costs also add to your expenses. For example, California and New York are known for their pricey real estate and standard of living. And some states may be more expensive to do business in than others. 

According to Nellie Akalp, CEO of business filing service CorpNet, first-time entrepreneurs should consider the following costs:

• Formation fees: Usually a one-time deal, costs can range between $100 to several thousand dollars depending on the state.
• Annual compliance fees: Some states require yearly filings for licenses and certificates. 
• Investor appeal: Not an expense per se, but it can hurt your ability to raise funds from venture capitalists if your state has unfavorable business laws. 

Other business expenses may include equipment, inventory, and delivery fees. Many business expenses are tax deductible, which can be helpful if you live in a high tax state. 

Growth potential 

As you’re browsing for a home base for your business, consider the state’s workforce and whether there’s a healthy market for your product or service. 

You can get an overview of a state’s current labor force through the . Then, research potential competition (ideally there aren’t too many businesses like yours locally, but enough to show there’s a demand). 

Also, look at the population of the city and surrounding areas, and whether it’s growing, declining, or stable; offers excellent insights on population, income range, education levels, and other demographics. 

10 best states to start a business in 

Finding the best state can be highly subjective depending on your business needs. However, , a network for senior execs, surveyed CEOs across America to get their opinions. 

Here is a top 10 list based on their data. 

1. Texas

Texas was voted the best place to start a business in 2020 and 2021, with five of its cities as excellent locations for entrepreneurs:

• Loredo (#1)
• Lubbock (#3)
• Austin (#8)
• Fort Worth (#9)
• Dallas (#14)

The Lone Star State has no corporate or personal income tax, though their . It’s seen an influx of startups — there were over 490k new business applications in 2021 — and its is below the national average. 

It has a sizable labor pool, with 14m+ working adults and an average salary of $57,382. The startup costs are also reasonable: It’s or for-profit corporation.  

2. Florida

is a popular destination for vacationers, retirees, and young families — making it a great location for many companies. There’s no individual income tax and a 5.5% corporate income tax. 

Only , such as C corporations. However, if you set up your company as an LLC, sole proprietor, or S corporation, you’re exempt from income tax. 

The is slightly higher than the national average, but the labor force is , with an average salary of . 

Starting a business in Florida will cost you and $965 for a limited partnership. 

3. Tennessee

Tennessee has a cost of living, no individual income tax, a strong infrastructure, and pro-business regulations. The state corporate tax is 6.5%, but there are sales and use tax exemptions for equipment and machinery used in manufacturing, data centers, warehousing, and research and development. 

There are nearly in the state with an average salary of $36,356 — and its share of skilled labor is growing. Its program aims to equip 55% of its residents with a college degree or certificate by 2025.   

But if you’re interested in registering a business here, the fees are higher than usual — somewhere . 

4. North Carolina

The state already boasts a low corporate tax rate of 2.5%, which it’s . And it has a meager — great news if your business plans to own a lot of real estate. 

There are over 5m working adults with an and a 3.4% unemployment rate. The is lower than the national average, and it only takes your company.

5. Indiana

Indiana has a growing population (and workforce), with over and a 2.2% unemployment rate. It also has business-friendly taxes — , while the individual income tax rate is 3.23%. 

The here is well under the national average, and the , which is more affordable for startups hiring their first employees. 

To register a company in Indiana, you’ll have to pay a .

6. South Carolina

In 2021, South Carolina attracted $5.7B in capital investments while creating 18k new jobs. It has also invested in recent years — handy if your company needs to ship products overseas. The state has a history of exporting to major economies like Germany and China.

Even though the state’s average salary is , its is comparatively low, making it an attractive place for employees. There are over 2.2m working adults and a 3.3% unemployment rate. 

The , and the individual income tax rate is 7%. The here is also affordable, at $100. 

7. Ohio

Home to Fortune 500 companies like Kroger, Macy’s, and Procter & Gamble, Ohio has no corporate tax and a low . 

It boasts 5.7m+ working adults, with an and a below-average cost of living. To , you’ll have to in registration fees.

8. Nevada

Nevada is a good landing spot for more than just casinos. There’s and no individual income tax, though it has a sales tax of 8.23%. The state saw a in annual business applications between 2019 and 2021, and its consumer spending is . 

The cost of living here is , and its workers earn comparatively higher wages at . The fee to start a business in Nevada depends on your formation. An and between $75 and $125 to incorporate.

9. Georgia

The state’s capital, Atlanta, is emerging as a tech hub; startups in Georgia pulled in nearly during the first half of 2021. 

Georgia’s taxes are relatively high compared to others in the top 10. Business owners have to pay and 5.75% for individual income tax. But there’s a working population of , and the .

To register a business in Georgia, it’ll cost between . 

10. Arizona

Arizona has the in the US, and 60% of its adults participate in the workforce. The tax policies here are also lower than most, sitting at and 4.5% for individuals. 

The cost of living is , but the . To incorporate a business in Arizona, the for for-profit companies (LLCs and corporations). 

Five worst states to start a business in

A combination of strict business regulations, high living and business costs, and/or high taxes make these states unfriendly to new ventures, according to the same Chief Executive report.

California is ranked #1 for its pricey living and business expenses. The state also has a complex, ever-changing regulatory landscape, which makes it tough for small businesses to keep up. For example, the California Consumer Privacy Act of 2018 requires companies to take specific steps to protect consumer data it collects — a potentially expensive task for a startup. 

Baruch Labunski, CEO at Rank Secure, an SEO agency, incorporated his business in California because he lives there. He points out that the state’s disadvantages include a 8.84% corporation tax rate and an average sales tax rate of 8.82%. 

Other worst states to start a business include:

• New York: Financing in New York isn’t easily accessible — small business loans have a low value of less than . And the cost of living is high for entrepreneurs.  
• Illinois: High taxes is one reason this state ranked low 11 years in a row (e.g., the combined sales tax in Chicago is ~10.12% ). It also has unfriendly business regulations and a lack of talent availability. 
• New Jersey: This state ranks low in key areas such as labor costs, office-space affordability, and cost of living. Perhaps unsurprisingly, small-business growth here is low.
• Washington: High cost of living and burdensome regulations sank the Evergreen State’s ranking. Even its top talent pool and education system . 

Keep in mind that business regulations and taxes can change from year to year, so always research and consult with a business attorney and accountant to get expert advice before choosing your startup’s home. 

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