Are You Starting a Business in the Right State? Ask These 5 Questions

Deborah Sweeney

Contributor at Fundera
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best.

Each year, the 50 states of the United States of America are scored and ranked to determine which one is the “best” to start a business. According to research conducted by the CNBC Global CFO Council, the top state for business in 2018 was Texas. However, that rank is based solely on “overall” criteria. Ten other categories must also be considered to determine how the 50 states score:

  • Workforce
  • Infrastructure
  • Cost of doing business
  • Economy
  • Quality of life
  • Technology and innovation
  • Education
  • Business friendliness
  • Access to capital
  • Cost of living

Within the remaining categories, Texas ranks number 1 only with economy and infrastructure. Its rank bounces around significantly, even dropping down to 37 in one category. Does this drop mean it’s not a good state to start a business? Of course not.

But how do entrepreneurs know that they are starting a business in the best possible state? Studies like these are certainly helpful. If you don’t know where to start, they’re a great baseline to figure out where your business might thrive. However, there are some questions only you can ask—and answer—to figure out where to get started. Let’s take a look at which questions to address first.

Where is my business headquartered?

Where do you physically plan to conduct business? Will you have offices in multiple states? Where will your employees be located? If you run an online business out of one state, will you try to take advantage of tax-friendly states and file to foreign qualify and register your business in another state?

Many entrepreneurs tend to incorporate a business in the same state in which they live and work. This ensures everything is in one place when it comes to filing annual reports, getting a registered agent (which must have a physical address in the state you do business), and paying formation fees. As we mentioned earlier, you may also have a physical business location in a state outside of the one you incorporated the business. If you are headquartered in two separate states with physical offices, you must file for a foreign qualification. This gives your business the authority to conduct operations across state lines.

The mindfulness mantra “wherever you go, there you are” also applies to small business. Wherever your business chooses to physically be located, it will need to able to legally operate in that state.

Can I reach my target audience?

The earliest stages of starting a business require drafting a thorough business plan. One key section of a business plan is the market analysis. This determines the target audience for your small business, what they need, and how your business can fulfill their needs. A market analysis breaks down the demographics of this audience, and allows you to address how you will attract, capture, and retain this audience as well as those outside of it.

Target audiences vary for every small business. Entrepreneurs reading this may already have a pretty good idea of where their target audience resides. If they know which cities and states that their business is needed in, they’ll flock toward locations containing their customer base.

starting-a-business-in-the-right-state

How small business friendly is this state?

The United States Small Business Friendliness Survey created by Thumbtack provides viewers with a map of the United States based on friendliness. From 2012 until the present, you can easily examine which states (and cities!) are the friendliest to small businesses.

As noted earlier, business friendliness is one of the top criteria for determining which states are best for startups. The Small Business Friendliness Survey breaks it down even further to determine what it means for a city and state to be small business friendly. Grades are given out to aspects that include regulations, licensing, and employment, labor, and hiring. Beyond reviewing surveys like these, check with your local secretary of state. If you have additional questions about the state’s small business friendliness, they’ll be more than ready to help answer them.

Do entrepreneurs gain tax advantages?

Some states offer great advantages when it comes to state and local taxes. States like Alaska and South Dakota do not have state income taxes. This allows the average small business owner to pay back significantly less in state and local taxes than they might have in the 48 other states. You may not necessarily choose to start a small business in a state that has no or a small state income tax percentage simply for tax purposes. However, it’s still an important question to ask for your business in the long run.

Are relevant resources available?

Do you need extra help with your startup, like business funding or programs that help create new jobs? Check in with your secretary of state or the local chamber of commerce to see what resources are available for small business owners. You can also reach out to the U.S. Small Business Administration (SBA) for the nuts and bolts to starting, launching, and managing your small business. Should you need further advice, reach out to your local SCORE chapter and request to find your own mentor.

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At the end of the day, some cities and states may look good on the surface to start a business. They may also rank high in surveys. However, what works for one business may not work for yours. No matter which state you start a business in, ask yourself where it will be headquartered and how the location will help you reach your audience. Find out if the state is small business friendly, provides tax advantages, and has other resources your business may utilize. Doing a little bit of research now will help you succeed and thrive in the long run.

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.

Deborah Sweeney

Contributor at Fundera
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best.

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