The 10 Best (and 5 Worst) States to Start a Small Business

Coming up with a solid idea is the first step to launching a successful business. However, it isn't the only — or even the most important — factor in determining whether your business will succeed or fail.

In fact, where you establish your business could have a huge impact on how well your business does and whether it will help grow your wealth.

We looked at factors like income tax, corporate tax rates, and cost of living to create our list of the 10 best states for starting a business — along with the five worst places to grow your business.

Arizona might be best known for its high desert climate, extreme temperatures, and Grand Canyon access, but it's also one of the best states in the nation for successful startups.

According to some of the most recent data from the U.S. Small Business Association, Arizona gained more than 7,000 net new small businesses between March 2020 and 2021.

And while Arizona has an above-average cost of living, its corporate income tax rate maxes out at a reasonable 4.9%, which makes Arizona a tax-friendly state for businesses.

At 4.55%, Colorado's top corporate income tax rate is even lower than Arizona's.

While the state has a higher cost of living than most of the states in our top ten (mostly due to its housing market), Colorado was still able to gain more than 9,000 net new businesses in 2020.

The state also has quite a bit of funding available. For example, in 2020, small businesses with annual revenue at or below $1 million were given $2.4 billion in loans.

Florida doesn't have a state income tax, which helps offset its above-average corporate income tax rate of 5.5%.

In 2022, small businesses accounted for 99.8% of all businesses in Florida, a slightly higher percentage than in states like Arizona (99.5%) and New Jersey (99.6%).

Florida also has had the highest rate of new entrepreneurs in the country, according to a study from the Ewing Marion Kauffman Foundation.

Small businesses in Idaho added almost 17,000 new jobs to the state's economy between 2020 and 2021.

Although the number of people moving to Idaho is slowing down, Idaho had the second-highest growth rate of any state in the country in 2022. That means business owners in Idaho can generally count on having a solid workforce.

Indiana's low cost of living is typical for many states in the Midwest. Businesses enjoy a relatively low corporate tax rate of just 4.9%, which is complemented by a low individual income tax rate (3.15%) and a lack of local sales taxes.

According to the SBA, in 2020, banks in Indiana granted a total of $1.9 billion in loans to state businesses with annual revenue of no more than $1 million.

With no corporate income tax, personal income tax, franchise tax, or inventory tax, Nevada is easily one of the best states for businesses that want to keep tax payments low.

In 2020, Nevada gained a net total of nearly 6,000 new businesses. While the state lost a net total of 26,000 jobs in the small-business sector that same year, Nevada businesses were given around $873 million total in loans.

Of the 44 states with a corporate income tax, North Carolina's is the lowest at a flat rate of only 2.5%.

North Carolina has a perfectly middle-of-the-road cost of living, coming in 24th on a list of most affordable states.

Plus, the state added a healthy number of new businesses in 2020 with a net increase of 14,581 small businesses.

Like Nevada, South Dakota lacks both a personal and corporate state income tax. It's also one of just two states without a gross receipts tax, so you won't have to pay a state tax based on your gross sales.

The state comes in seventh out of all 50 states in terms of having a low cost of living. That means business owners won't have to spend as much to make ends meet.

With its above-average cost of living and high sales tax, Washington State might not seem like a good candidate for a list of the worst states for businesses.

However, high costs aside, businesses in Washington have a better chance of surviving than in any other state in the nation. Washington businesses have an 89% year-over-year survival rate.

Additionally, though most Washington businesses pay a business and operations tax, the state lacks both an income tax and corporate income tax.

Wyoming, like South Dakota, is free of a gross receipts tax, corporate income tax, and personal income tax.

As an additional incentive for both homeowners and small-business owners, Wyoming has one of the lowest property tax rates in the country, placing tenth on Rocket Mortgage's ranking of states by property tax costs.

In spite of its breathtaking beauty and unique culture, Alaska is one of the worst states for entrepreneurs hoping to start a new business.

Although the state's lack of an income and sales tax helps lower business' tax burden, its top corporate income tax rate of 9.4% is one of the highest in the country.

Many of the worst states for small businesses are located on the East Coast, in part because the area has a notably high cost of living.

As recently as 2019, Connecticut had the lowest startup survival rate in the country at just 69.4%, compared to the country's median of 79.4%.

This undeniably beautiful island paradise has to import most of its goods from the mainland, which contributes to its status as the state with the highest cost of living in the country.

Its corporate state income tax ranges from 4.4% to 6.4%. That's far from the worst tax rate in the nation, but it's definitely not the best.

With a statutory corporate tax rate of 11.5%, New Jersey's corporate taxes are the highest in the country. The state also has higher property taxes than almost any other state.

To make matters worse, the average cost of property per acre in New Jersey was a staggering $200,000 at the end of 2022, the highest in the country.

Even businesses in the state of New Jersey recommend that other business owners avoid the state. Per a survey conducted by the New Jersey Economic Development Authority, 75% of New Jersey CPAs recommend their business customers leave the state entirely.

With a few exceptions, most of the best states for small businesses generally gained more businesses and added more jobs than they lost in 2020.

In contrast, New York lost a net of 3,550 small businesses along with 444,048 jobs that same year.

The state's corporate income tax rate tops out at 7.25%. Combined with the state's income tax, state sales tax, and local sales tax, the corporate income tax imposes a fairly high tax burden on would-be business owners.

Set yourself up for success by carefully considering your location before opening your business's doors. It could make the difference between closing your business or successfully retiring early.

The good news is that as long as you have a stand-out idea and a solid plan, your small business can succeed just about anywhere.

At the same time, considering the cost of living in your area — including additional costs for business owners, like retail and property taxes — can drastically change how you budget for your business.