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Not Everyone Agrees Which States Are the Most Business Friendly

In which state in the country does small business have it best? That depends on the criteria you use to determine each states’ business climate, and different small business consultants are likely to come up with different answers to that question.

Each state’s economic conditions, tax structure and regulatory code all play a part in determining how well small businesses there are doing and how profitable they are, and there are many less tangible factors, too. Although asking which states are best may be an impossible question, several different organizations try to answer it every year by rating and ranking the them on their environments for businesses in general or small businesses in particular. Perhaps not surprisingly, the results of these rankings do not necessarily agree with each other – or even with the actual amount of small business activity taking place within each state.

Every year for the past 16 years, the Small Business & Entrepreneurship Council has ranked states’ favorability toward small business entrepreneurs on its “Small Business Survival Index.” For the 2011 index, the most recent, the SBE Council’s chief economist crunched numbers for 44 statistics, all related to state and local government policies, that could affect small business success. Among the factors studied were the rates for various business taxes, fuel taxes and wireless telecom taxes, as well as the level of state and local government spending, the number of health insurance mandates, the crime rate, electric utility costs and “highway cost effectiveness.”

South Dakota has topped the SBE Council index two years in a row. New York and New Jersey were the lowest-ranked states for both years, although the very bottom 51^st spot on the list was taken both times by the District of Columbia.

Looking at the rankings, one professor of entrepreneurship noted that South Dakota’s high ranking hasn’t necessarily made it a magnet for small business. In fact, another Upper Midwest state, Wisconsin had the highest number of small businesses per capita in the country in 2010, while ranking only 31^st on the SBE Council’s index that year.

Wisconsin fared similarly, but slightly worse at #40, on a list of the best states for business compiled by Forbes in 2011. Forbes’ rankings give heavy weight to three major business costs in each state – labor, energy and taxes, and while they’re not specifically oriented toward small business, the Forbes rankings do have points of agreement with the SBE Council’s index. Utah has been at the top of the Forbes list for two year in a row (it’s ranked #14 by the SBE Council) and Maine has been at the very bottom for the same years (which aligns with its lowly #45 and #46 rankings on the “Survival Index”). But the top choices of the SBE Council, South Dakota and Nevada, fall to #17 and #36 respectively on the Forbes list. The state of North Carolina presents another huge disparity – Forbes ranked it #3 in 2011, while the SBE Council placed the Tarheel state way down at #37.

The U.S. Chamber of Commerce ranks states on their friendliness toward business in terms of the level of taxation and business regulation in each state. The Chamber concurs with the SBE Council on South Dakota, putting it at #2 on its 2011 list, but gives its top spot to Tennessee, which has a middling ranking on the SBE Council list. Like Forbes and the SBE Council, the U.S. Chamber of Commerce gives top 10 rankings to Utah and Texas. Wyoming makes the top 5 on both the Council and the Chamber’s lists, and Forbes puts the Cowboy State fairly high at #14.

Meanwhile, the Small Business Administration’s Office of Advocacy compiles an annual snapshot of small business activity by state (including openings, closings and bankruptcy filings). The SBA figures give the number of active small business operations in each state without weighting them on a per-capita basis, so it may not be too surprising that low-population states like South Dakota and Wyoming don’t even make its top 20. But among the states with the most small business are ones that placed both very high (Texas, Florida, Washington, Tennessee, Ohio) and very low (New York, New Jersey, Michigan, Minnesota, Maryland, Massachusetts) on other organizations’ rankings of friendliness toward business.

Wherever your enterprise is located, PADGETT BUSINESS SERVICES® can help you with expert bookkeeping, payroll and tax services. Padgett has more than 400 offices across the United States and Canada. We take the accounting burden off of small business owners so that they can focus on innovation and their companies’ growth. We also offer business advising and consulting services.