A state saying it’s unfriendly toward small business is kind of like saying they hate sunshine and puppies. But much like in life, actions speak louder than words, and while your state’s leaders may say they’re great for small business, that may well not be the case. Here are some things to look at - and what other studies have found - to determine whether or not your state is small business friendly.
What Exactly Is Friendly?
Much like with people, the criteria for what makes something considered “friendly” varies depending on who is doing the ranking. For the past three years, the professional hiring site Thumbtack.com has taken its own survey of small business owners to determine the most small business-friendly states in the nation, and found out what was most important to them.
That survey - the results we’ll get to later - found that the most important factor for small business is the ease of professional licensing requirements.
When it comes to those metrics, Texas, Utah, Virginia, and Idaho ranked highest. California, Massachusetts, Rhode Island and Illinois were lowest.
But the Thumbtack survey - done in conjunction with the Kauffman foundation - took many other factors into account. Among them were ease of hiring the right employees, environmental standards, and, obviously taxes.
While taxes are always something you need to consider, nearly 2/3 of Thumbtack’s respondents said they paid about “the right amount” of taxes every year.
So, yes, it’s a factor. But it’s also not the be-all, end-all of small business friendliness.
But the leading indicator of whether or not a state was small business friendly? Training and networking programs. A state with a strong university program will provide a lot of these opportunities, but you may also want to research how many professional organizations your state has.
The leaders there were Minnesota, Idaho, Maryland and Oklahoma. While Missouri, Mississippi, Pennsylvania and New Jersey performed worst.
For the three years that the survey has been conducted, we took an average of the overall friendliness grades to see which states have consistently been friendly towards small business, as shown in the infographic below:
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It's Not All About Taxes
The Tax Foundation produced a State Business Tax Climate Index of all 50 states based on more than 100 measures. Its Top 10 were:
- South Dakota
- New Hampshire
Since almost 90 percent of small businesses register themselves as sole proprietorships, the absence of a state corporate tax - as is the case in Wyoming, South Dakota and Nevada - isn’t the only thing to look at. Florida, Washington and Alaska all rank highly because they don’t have a personal state income tax, a far more relevant measure if you are registered as a sole proprietorship.
But, a state can have those taxes and still be small business friendly. Utah and Indiana - who round out the Top 10 here - both have income and corporate taxes, but keep them low and levy them on a broad base.
The bottom five for tax friendliness? Rhode Island, Minnesota, California, New Jersey and New York.
What Else Makes A State Friendly?
So why, despite ranking near the bottom in both tax policy and overall friendliness, does California still rank in the Top 5 in a CNN/Money study for best places for startups? States do other things to make themselves attractive to small business past simply easing the governmental reigns.
Local chambers of commerce can give grants to entrepreneurs to encourage this sort of growth. Boise, Idaho has their “B Launched” campaign that helps turn ideas into startups and gives tax credits for adding new jobs.
As mentioned before, local universities can aid the small business environment as well. Mississippi State University, for example, has an entire business development center where entrepreneurs can enroll in business training “boot camps” to help get them going the right way.
They can also provide small business incubators that let a business grow in a controlled environment before heading out into the cold cruel world.
Logistics are also crucial. For example, Alaska has no state income or sales tax and a low business tax. But the cost of getting goods, shipping, transportation and labor are all far higher than in other states, thus making Alaska less attractive. Aside from the cold.
So while it’s not like you can pick up your business and move to South Dakota because the taxes are lower, you can use this information to help your business. Like when it comes time to vote, see which candidates are more likely to ease the barriers to small business ownership. Or band together with your local chamber of commerce to try and get things changed. Also, seek out educational institutions in your area and see if they offer development or networking programs. And if they don’t, start them up. No matter what state you’re in, knowing the climate for small business is important before you set out on your own. And the better prepared you are, the more likely you are to succeed.