Business Formation – Best States for a Small Business

A question that I often get from current or potential small business owners is “What are the best States for a Small Business?” This question is often asked with two focuses in mind – financial/accounting (tax and fee expenses and friendliness to small businesses), and legal reasons. To the legal reasons and risks of setting up your business in one State over another, I will defer to the lawyers as this is not my area of expertise. I can, however, speak to the financial/accounting focus on tax and fee expenses and friendliness toward small businesses. I would like to share my answer to this question below.

2012 Thumbtack Small Business Survey

In answering this question, I would like to refer to the 2012 Small Business Survey on Small Business Friendliness. This survey is based on 6,000 small businesses from around the nation concerning the following factors:

  • Ease of starting a business
  • Hiring costs
  • Regulations
  • Healthy & Safety
  • Employment, labor & hiring
  • Tax code
  • Licensing
  • Environmental
  • Zoning
  • Training Programs
  • Networking Programs
  • Current economic health
  • Optimism about the future
  • Growth rate last year

Here is a picture of where each State sits overall in the survey:

2012 Small Business Survey

As you can see in the overall survey, the 5 friendliest States are Idaho, Texas, Oklahoma, Utah, and Louisiana. The 5 least friendly States are Rhode Island, Vermont, Hawaii, California, and New York.

Factors to Consider

The main issues that I look at when I look to answer the question of the best States for a small business, I look to the ease of starting a business, hiring costs, employment, labor & hiring, tax code, and licensing. These same States above reflect the general position in each of these areas. My reasoning for emphasizing these areas is because these areas are what are going to cost you the most in your business.

In terms of ease of working with a State and taxes, my personal experience with California has been horrible in that I have had to spend a lot of time on behalf of clients just working through the bureaucracy, let alone the significantly higher taxes. This has cost these companies a lot more than just the fees and taxes, but additional accounting fees on top of this.

The Answer for Your Business

The biggest issue for your business on the financial/accounting side (not legal) is what State you are doing business in. Whatever State you incorporate in or set up your LLC in does not matter on the financial/accounting. The reason is that you have to register as a foreign entity in any State where you do business or have employees, and foreign entities are subject to almost all of the same fees and regulations as if they your business was set up in that State. So for financial/accounting reasons, you should set up your business in the State in which you plan to run your business as you will only need to set up in that one State.

The example I shared above involved a company that was incorporated in a State other than California and was required to do business as a foreign entity. I had to file State reports and filings in 3 States including California, which was the worst by far. This is why I advise my clients to avoid doing business in California and the other States listed above unless they have a good and profitable reason for doing so.

Legal Focus

With all of this said on the financial/accounting side, you do need to take the legal focus into consideration when making the decision of what State you choose to set up your business in. I would find a lawyer who won’t charge you an arm and a leg for this advice, or read a few good books on the subject written by lawyers specifically for small businesses.

Wrapping up…

So that is my response to this common question from small business owners. It isn’t a complete answer because I do not offer or claim to offer legal advice in this arena. However, I do hope this has given you insight into the financial/accounting focus you need to understand in making this decision. Let me know if you have any questions with any of the issues I have raised here as I would be happy to help you out with your specific situation.

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