The 10 Best and Worst States to Start a Small Business

There are many important things to consider when launching your own business or side hustle, and location is at the top of the list. Local and state laws can mean different taxes, zoning regulations and licensing requirements, so it pays to be strategic about your choice of state, city and even neighborhood, according to the U.S. Small Business Administration.

Related: 5 Things Not to Do When You’re Running a Small Business

After all, some 20% of new businesses fail within the first two years of being open, according to the U.S. Bureau of Labor Statistics (BLS). The BLS also found that 45% of businesses fail within the first five years. That number jumps to 65% after 10 years.

Capital on Tap, a company that offers a credit card and spending management platform for small business owners, analyzed BLS data to determine the percentage of startups that are still active after three years — and broke down the U.S. states with the highest and lowest chance of survival in three- and five-year time frames.

“There are over 30 million small businesses in the U.S., making up an enormous percentage of the economy, and as this number continues to grow, so will innovation and commercial drive,” says Damian Brychcy, chief executive officer at Capital on Tap. “This research should serve as a positive sign to entrepreneurs in the top ten states who are thinking about starting a business.”

^{Image Credit: John Coletti | Getty Images. Boston, Massachusetts.}

Qualities of business-friendly states

Before diving into the data, it’s important to consider what factors make a state attractive for new business owners. And it’s about more than just starting a business. The following factors can help keep small companies afloat and lead to ongoing success:

Taxes

Perhaps the most important factor of all, a business-friendly tax environment can keep costs down and put more money in your pockets. There are payroll, employment, income and corporate taxes to worry about, all of which can affect decisions around hiring and expansion. Some states also offer tax incentives for small businesses, which can remove expensive hurdles. Reviewing a self-employed tax schedule in your area can help.

Workforce

If you want to run a healthy, growing business, you’ll almost certainly be hiring employees. The best states for small businesses will have a plethora of available talent and a workforce with high levels of college education. Starting a business near a college or university can also attract interest from recent graduates. This is especially prominent in the technology industry.

Regulations

State policies regarding small businesses involve more than just taxes and deductions. Government programs can offer business owners grants and loans and incentivize investment from larger funders. Compliance is another factor. States can lower the costs of business by removing regulatory red tape, such as required government approvals or clearances.

Growth potential

You want to start your business somewhere it can thrive in both the short- and long-term. A number of factors can support this — for example, funding, investment in infrastructure and livability. A close proximity to sources of financing can help your company grow, as long as the area can support your workers and their families. States and cities with a low cost of living, good schools and solid infrastructure will not only attract talent but keep it.