Best States to Start a Small Business in 2023: Ranked

If the entrepreneur in you has ever wondered what the most business-friendly US states are, you’ve come to the right place. 

Even though they make up one country, the states have surprisingly unique socioeconomic environments that can have a profound impact on the success of new businesses.

In this text, we compare the 50 US states in 17 metrics across 4 categories to find out which 5 states are the best for starting a business in 2023. 

It’s important to note that the District of Columbia was not included in the final ranking, although you will find various information on it throughout the text due to its economic significance for the United States as a whole. 

All the data regarding the states’ economies, workforce, business climate, and business costs we look at is pulled from the most recent public records currently available on US government websites or the official websites of each state. 

Read more about our methodology at the end of the text.

Best states to start a business — key takeaways

Before we start, here are a few key takeaways from our research:

• The best state to start a business in 2023 is Colorado. Colorado’s favorable tax rates, stable economy, high business investment rates, and the second most educated population in the US make it the best state to start a business in 2023.
• The worst states to start a business in 2023 are West Virginia and Mississippi. As the complete opposites of Colorado, West Virginia and Mississippi have some of the highest poverty rates in the US, rank lowest in higher education, and have some of the lowest business growth rates in recent years.
• Massachusetts is the state that ranks 1st in education. At 45.2%, Massachusetts holds the crown for the state with the most people over 25 with a bachelor’s degree or higher. The only other US territory not counted among the states that surpasses Massachusetts is the District of Columbia, at 61.4%.
• California has the highest business survival rate. The latest data shows that California’s average year-to-year survival rate for the period between 2017 and 2022 was 88.3%.
• Montana has the lowest LLC formation fee. At just $35, Montana is the state with the lowest business formation fee. For comparison, the state with the highest business formation fee is Massachusetts ($500).
• Louisiana has the highest poverty rate. Louisiana currently ranks as the poorest state with the poverty rate at a staggering 19.5%, followed closely by Mississippi, at 19.2%.
• The state of New York has the highest GDP per capita in the US. New Yorkers have it good with their real GDP per capita standing at $104,343. Perhaps unsurprisingly, the only other territory that surpasses this is the District of Columbia, at $241,610.

Despite not being ranked among official US states, the District of Columbia is one of the most important economic areas in the nation. 

It has 17 universities scattered across only 68 square miles, and therefore the highest concentration of young, bright, and motivated workers in the country. This makes it a good business location despite its high taxes, poverty rate, and cost of living. 

For this reason, you will find our scores and ranking for Washington DC in the table below, showing its potential rank, even though the city isn’t included in the official list.

Now, with the explanation out of the way, let’s move on to the ranking of the best states to start a business in 2023.

#1: Colorado — the best state to start a business

Colorado is the best state to start a business in 2023. 

The most recent data paints Colorado in a favorable light as the state with: 

• Moderate taxes, 
• A highly educated workforce, and 
• A stable economy that allows for a high year-to-year business survival rate of 84.1%.

Colorado’s high real GDP per capita ($82,941), comparatively moderate expenditures ($59,371), and a lower-than-average unemployment rate (3.1) speak of a stable economy where businesses can thrive. 

Some such businesses you might have heard of with headquarters in Colorado include Western Union, Celestial Seasonings, and everyone’s favorite casual shoe company — Crocs.

#2: California — the state with the best business survival rate

Perhaps surprisingly, the runner-up on this list is California. 

Yes, California is a very expensive place to live, but it actually beats Colorado when it comes to income/expenditure ratios. 

Namely, the real GDP per capita in California is $92,190 — one of the highest in the nation — while expenditures per capita are barely $1,000 higher than in Colorado, at $60,272.

While the competition is tough, California still managed to have the highest year-to-year business survival rate in the nation at 88.3% measured over the course of 5 years, between 2017 and 2022. 

Lastly, California has some of the best financial availability for both small and larger businesses.

As per the latest 2022 SBA Small Business Profile, banks in California approved $14.8 billion in loans to businesses with revenues under $1 million or less in 2020. California was also the state with the second largest venture capital funding per $1 million of GDP in 2022.

Seeing as the state is home to Silicon Valley, California is home to some of the most famous tech companies in the world, such as Apple, Google, Intel, Adobe, and many others.

#3: Massachusetts — state with the highest rate of educated workforce

Similarly to California, Massachusetts is a rich state with a thriving economy. 

It has its disadvantages in the form of a high cost of living and slightly higher tax rates. But, it also comes with a number of perks, such as:

• The second-highest real GDP per capita in the nation ($98,596), 
• The highest venture capital investments per $1 million GDP of $57,498.28, and
• Low unemployment rate (2.6%).

Furthermore, Massachusetts has the highest rate of highly educated population in the nation, at 45.2%.

Massachusetts has also recognized the importance of high-bandwidth Internet in the 21st century and ranks among the states with the highest percentage of people with access to the Internet with at least 100 Mbps downstream (85.2%). This is ideal for anyone looking to start an online or remote-first business.

In case you were wondering, Massachusetts is also home to many popular businesses, such as Dunkin’, Reebok, Polar Beverages, and many others.

#4: Utah — state with the mildest business climate

Utah takes the 4th spot on our list mainly due to its mild business climate. 

And, by “mild” we mean that it doesn’t go into extremes on either end of the spectrum with any of the metrics we tracked, unlike California and Massachusetts. 

Utah has a moderate cost of living, a GDP per capita of $73,408 that’s close to the national average, and a slightly above-average rate of highly educated workforce (35.4).

Utah is also blessed with relatively low individual and corporate tax rates, as well as low unemployment rates (2.5%), and a high business survival rate (84.4%). These factors make it a favorable place to set up shop regarding both the business expenses and the quality and availability of qualified workforce.

Some successful businesses headquartered in Utah include Young Automotive Group, Ancestry.com, and Vivint.

#5: Florida — state with the highest growth in the number of businesses

Finally, spot number 5 goes to Florida. 

As a state with moderate-to-low taxes across the board, Florida makes for a good business location. This is especially true for sole proprietors working from home, given the lack of individual taxes and the high-speed internet connection available throughout the state (and the lovely weather, of course).

But that’s not all Florida has to offer. To be precise, the year-to-year business survival rate in the state was a solid 84% between 2017 and 2022. 

Moreover, between 2020 and 2021, Florida was the state with the highest growth in the number of businesses, coming in at 29,995. For comparison, Colorado, California, Massachusetts, and Utah had 9,608, 9,768, 4,622, and 6,589 respectively.

Additionally, Florida enjoys a low unemployment rate (2.7%) and a close-to-average cost of living with a score of 101.9 (100.0 being the national average). 

Overall, this is a favorable state to start a business, despite its slightly lower per capita GDP.

Some popular businesses that decided to make their home in Florida include Burger King, Darden Restaurants, and Office Depot.

Ranking of the best and worst states to start a business in 2023

This table shows the complete ranking of the best and worst states to start a business in the US and how well (or badly) they fared in each of our 4 categories. You can find out more about our categories and scoring system at the end of this article.

Note: The District of Columbia was not included in the ranking, but the table shows where it would have ranked if it had been included.

Rank & State	Business Costs	Business Climate	Economy	Workforce and Internet access	Total score
1. Colorado	20	21	24	16	81
2. California	11	25	23	13	72
3. Massachusetts	9	20	24	18	71
4. Utah	20	19	18	14	71
5. Florida	19	20	18	12	69
6. Virginia	16	16	20	16	68
7. North Carolina	18	20	16	13	67
8–11. Illinois	9	20	23	12	64
8–11. Arizona	20	18	17	9	64
8–11. Georgia	15	19	18	12	64
8–11. Washington	11	14	25	14	64
12–16. Maryland	13	13	19	18	63
12–16. New Jersey	5	18	25	15	63
12–16. Pennsylvania	13	18	19	13	63
12–16. South Dakota	20	10	20	13	63
12–16. Wyoming	24	9	21	9	63
17–18. North Dakota	17	10	21	14	62
17–18. Texas	11	21	19	11	62
19–22. Missouri	16	16	19	10	61
19–22. Indiana	19	15	18	9	61
19–22. Nevada	18	17	17	9	61
19–22. New York	9	15	22	15	61
23–25. Delaware	14	12	21	13	60
23–25. Connecticut	8	15	23	14	60
23–25. Tennessee	17	16	15	12	60
26–28. Montana	16	15	16	12	59
26–28. New Hampshire	12	11	18	18	59
26–28. Oregon	12	15	19	13	59
29. Minnesota	9	15	22	12	58
30–31. Ohio	11	16	18	11	56
30–31. South Carolina	18	14	12	12	56
32–34. Kansas	12	12	20	11	55
32–34. Nebraska	12	11	20	12	55
32–34. Rhode Island	12	9	18	16	55
35–38. Maine	11	11	19	13	54
35–38. Michigan	15	12	17	10	54
35–38. Oklahoma	18	11	14	11	54
35–38. Idaho	16	15	14	9	54
39–40. Vermont	8	11	19	15	53
39–40. Wisconsin	9	15	17	12	53
41. Alaska	13	9	19	11	52
42–43. Hawaii	14	9	16	12	51
42–43. Arkansas	18	12	13	8	51
44–45. Kentucky	18	11	13	8	50
44–45. Louisiana	18	10	13	9	50
46–48. New Mexico	17	10	15	7	49
46–48. Iowa	11	10	19	9	49
46–48. Alabama	17	11	11	10	49
49–50. Mississippi	19	10	11	8	48
49–50. West Virginia	17	9	14	8	48
30* DC	8	11	22	15	56

*Shows the rank the territory would have had if it had been included in the ranking.

FAQ about starting a business in the USA states

To answer more of your burning questions, we’ve put together a section where we answer some of the most frequently asked questions about the best states to start a small business or startup in the US.

What are the best states for startups?

The 2 best states for startups are California and Massachusetts due to their high rate of venture capital investments and focus on technological advancements.

What is the best state to start a business for tax purposes?

The best states to start a business for tax purposes are Wyoming and Delaware. 

Wyoming levies neither corporate nor individual taxes. Delaware doesn’t levy corporate taxes on corporations that operate in the state and doesn’t require people who live outside the state to pay taxes on shares within the state.

What are the most business-friendly states?

Some of the overall most business-friendly US states include Colorado, Utah, and Florida. What makes these states some of the most favorable places for starting a business in the US are:

• Relatively low taxes, 
• Simple formation procedures, 
• Ready access to funding, 
• High business survival rates, and 
• Stable economies.

But, for the most part, the best state to start your business is the state you live in.

What are the worst states to start a business?

Some of the worst states to start a business in the US include: 

• West Virginia,
• Mississippi, and 
• Alabama.

Unfavorable business conditions that cause low survival rates often include high taxes, high unemployment rates, high poverty rates, low income per capita, and a high cost of living. 

Neither of these metrics is a major factor by itself, but a combination of them creates more or less favorable conditions. 

These states have very low incomes and comparatively high expenditures, as well as extremely high poverty rates. This causes them to have minimal or even negative business growth, regardless of their perceivably low cost of living and relatively low tax rates compared to other states.

How we ranked the states

To create a ranking of the best states to start a business, we examined the latest available data for 17 metrics over 4 categories: 

• Business costs (30 points),
• Business climate (25 points),
• Economy (25 points), and
• Workforce and Internet access (20 points), for a maximum of 100 points.

The following text will explain each of them in more detail.

Business costs	Business climate	Economy	Workforce and Internet access
– Individual tax (7) – Corporate tax (7) – Property tax (7) – Formation fee (3)	– Growth in businesses since last year (8) – Business survival rate (6) – Venture capital investments per $1M GDP (6) – Bank loans (5)	– Expenditure per capita (7) – Real GDP per capita (7) – Cost of Living (7) – Minimum wage (6) – Poverty rate (4)	– Unemployment (5) – Working populace (5) – Educated populace (5) – Internet access (5)
Max 24 points	Max 25 points	Max 31 points	Max 20 points

Business costs (max 24 points)

Taxes are a major factor when choosing where to start a business. 

Unlike the formation fee that you pay once, taxes will significantly impact your overall earnings. This is why the business costs category consists of 4 metrics divided and scored in the following manner:

Individual income tax (max 7 points) 

The lower the income tax, the higher the score. 

Individual income taxes refer to the taxes levied on the amount of personal income, regardless of the source. 

The information on individual, corporate, and property tax rates was drawn from the 2023 state business tax index and the Tax Foundation state tax data.

Corporate tax (max 7 points) 

The lower the taxes, the higher the score. 

Corporate tax refers to the taxes corporations pay on their profits. If an LLC is considered a corporation for tax purposes, it also pays corporate taxes.

Property tax (max 7 points) 

The lower the taxes, the higher the score. 

Property tax refers to the tax levied on the value of owned property.

Formation fee (max 3 points) 

The lower the fee, the higher the score. 

The formation fee refers to the one-time fee required to submit the Articles of Organization — a form used to create a limited liability company (LLC). Each state’s LLC formation fees are available on the states’ official websites.

Business climate (max 25 points)

Being aware of the overall business climate within the states you’re considering to open your business in could help you make a more informed decision on the best location for your business and therefore increase your chances of success.

The business climate category includes the following 4 metrics:

Growth in the number of businesses compared to the year prior (max 8 points) 

The higher the growth in the number of small businesses, the higher the score. 

Small businesses create new jobs, contribute to the economy, foster innovation, and have a positive impact on the environment as they tend to source their materials locally. 

We used the 2022 SBA Small Business Profiles for the states to find the growth in the number of businesses for the period between March 2020 and March 2021 and the amount of bank loans.

Year-by-year business survival rate for the past 5 years (max 6 points) 

The higher the survival rate, the higher the score. 

The business survival rate shows how likely businesses are to survive year-to-year in a given state. 

We calculated the average business survival rate for the past 5 years (2017–2022) from the data available at the U.S. Bureau of Labor business employment dynamics page.

Amount of venture capital investment per $1 million GDP (max 6 points) 

The higher the investment, the higher the score. 

The data on venture capital investments was found on the Science & Engineering State Indicators webpage on venture capital disbursement. 

According to the source, venture capital investment per $1 million GDP shows the magnitude of venture capital investments, adjusted for the size of a state’s economy. Venture capital is one of the main sources of funding for start-ups and tech companies.

Amount of bank loans approved for businesses with a revenue of less than $1 million (max 5 points) 

The higher the loans, the higher the score. 

This metric suggests how much banks are willing to invest in small businesses in a given state and how easy it is to get starting capital.

Economy (max 31 points)

Individual incomes and expenditures, as well as the cost of living and poverty rates, are a good indicator of the stability of the state economy. 

These metrics also provide insight into how much people have to spend on essential vs non-essential goods — which directly impacts the likelihood of businesses’ success within that state.

This category was divided into 4 metrics and scored in the following manner:

Real GDP per capita (max 7 points) 

The higher the GDP per capita, the higher the score. 

Real GDP per capita refers to a state’s total gross domestic product adjusted for inflation and divided by the number of residents. It’s normally used to gauge the economic prosperity of a territory. 

The data regarding the real GDP per capita for 2022 was provided by the Institute for Policy and Social Research. 

Personal consumption expenditures per capita (max 7 points) 

The lower the expenditures, the higher the score. 

Personal consumption expenditure refers to the average total amount of money each person spends on a yearly basis. 

The data for the personal expenditures by state between 2021 and 2022 was sourced from the U.S. Department of Commerce, Bureau of Economic Analytics. 

Cost of living index (max 7 points) 

The lower the cost of living, the higher the score. 

Cost of living refers to the cost of necessities and other basic expenses — health care, utilities, taxes, food, and housing. 

We found the cost of living index by state for 2023 on the Missouri Economic Research and Information Center’s official webpage. 

Minimum wage (max 6 points) 

The higher the minimum wage, the higher the score. 

While it may seem counterintuitive to count high minimum wages as a positive factor for entrepreneurs (seeing as it directly increases their expenses), the minimum wage is a reflection of the economy within a state. 

High minimum wages contribute to reducing poverty rates, increasing purchasing power, increasing productivity at work, and reducing turnover, thereby reducing the costs of training and hiring new workers, according to a Berkeley News research report on the effects of a minimum wage increase. 

All the data on minimum wages by state was collected from the U.S. Department of Labor consolidated minimum wage data for 2023. 

Poverty rate (max 4 points)

The lower the poverty rates, the more points the state gets. 

According to the same research by UC Berkeley economists linked above, people in low-income households are much more likely to have poor physical and mental health, making them rely on safety-net support and putting a strain on government funds. These issues often lead to reduced productivity and sometimes even suicide. 

Poverty has an especially negative impact on the next generation of workers. 

Research has shown that children in low-income families are more likely to have bad health, do worse in school, continue to work low-income jobs in the future, and eventually turn to crime — all of which has a significant negative impact on a state’s economy. 

The latest data on poverty rates across US states from 2021 was sourced from the Department of Agriculture Economic Research Service.

Workforce and Internet access (max 20 points)

This last category is a slight mish-mash of metrics that couldn’t find their own place in any of the other categories. 

Nevertheless, they are important indicators of the type and quality of the workers who populate the state. The metric regarding Internet access was added due to the increasing popularity of remote work and the importance of the Internet in both running and marketing a business.

The category was subdivided into the following metrics:

Unemployment rate (max 5 points)

The lower the unemployment rate, the higher the score. 

Unemployment has a negative impact on state funds, reduces the purchasing power of the unemployed people, and lowers the state’s GDP and economic output. 

The rate of unemployed people by state as of August 2023 was sourced from the U.S. Bureau of Labor Statistics.

Percentage of working-age population (max 5 points) 

The higher the percentage, the higher the score. 

A greater number of working-age individuals within a state increases the state’s economic output potential and increases the pool of people employers have to choose from. 

We calculated the percentage of the working-age population by state for 2022 from the data collected from the U.S. Census Bureau.

Working population over 25 with a bachelor’s degree or higher (max 5 points)

The higher the education rate, the higher the score. 

More people with higher educational attainment means a greater pool of qualified employees for small businesses that need it. People with higher levels of education are also less likely to contribute to state unemployment rates. 

The rate of higher education across US states was taken from the U.S. Census Bureau.

Internet access (max 5 points)

The more widespread the access, the higher the score. 

The Internet has become an important part of business growth. 

A slow internet connection can hinder small businesses from accessing important data, the project management software that helps them run the business, or even the business itself in cases where the entirety of the business is performed online. 

The data on internet access across US states for 2021 was reported on by the U.S. Federal Communications Commission.

Best states to start a business — Conclusion/Disclaimer

Location is not the most important factor that determines the success or failure of a business, especially now, with the rise of remote work. 

However, it can be valuable to learn more about how different states fare compared to one another before you decide where to set up shop, in case you ever decide to expand or if you’re determined to optimize your business journey from the very beginning.

Keep in mind that this ranking was created according to the methodology explained in the text and with the latest data available in Q4 of 2023. Each new data report published after this time may change the ranking significantly. Therefore, we urge you not to use this text as the only means of determining the best state to start your business — do your own research and consult relevant professionals before making your decision.

Plaky is not responsible for any losses or risks incurred should this guide be used without further guidance from appropriate legal professionals.

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