Best and Worst States for Starting a Small Business in 2021

2020 was a rough year for small businesses. According to a Yelp.com report from September, nearly 100,000 small businesses with accounts on the website said they had permanently closed due to the ongoing COVID-19 pandemic. Businesses that have survived the pandemic continue to face numerous challenges, and more than half of small business owners don’t expect to return to the level of operations that were at pre-Covid for at least 6 months.

The good news is that there is evidence that the American entrepreneurial spirit has not been irreparably diminished. By late 2020, new business applications surged, as people used changes in employment status and shifting consumer needs as opportunities to launch their own enterprises.

While it’s hard to know exactly what the small business landscape will look like in a post-pandemic world, one thing will likely remain the same – location matters. Fifty different states represent 50 different climates for running a small business, from corporate tax rates to the education level of the potential worker pool.

Expertise.com evaluated all 50 states based on 24 business-related metrics, ranking them from best to worst overall, as well as in more specific categories, giving potential entrepreneurs key insights into the current small business climate in the U.S.

Methodology

To create our list of the best states for starting a small business, Expertise.com compared all 50 states based on 24 metrics, divided into three sub-categories: New Business Environment, Available Resources, and Business Costs.

Each metric was graded on a 10-point scale, and weighted based on importance. We determined each state’s weighted average, which was then used to calculate an overall rank, as well as ranks for each of the three sub-categories.

The most recently available data was used for all metrics.

Below are the 24 metrics and their corresponding weights:

New Business Environment:

  • Overall Number of Small Businesses (2)
  • Job Growth (Feb. 2019-2020) (2)
  • 5-Year New Business Survival Rate (2)
  • Rate of New Entrepreneurs Per State (1.5)
  • Overall Economy Growth (1.5)
  • GDP Growth (1.5)
  • “Digital States” Survey Grade (1.5)
  • Entrepreneurship Index (1)
  • Average Length of Work Week (1)
  • Industry Cluster Strength (1)
  • Number of Fast-Growing Firms (1)

Available Resources:

  • Loan Availability (2)
  • Share of College-Educated Population (1.5)
  • Number of Higher Education Institutions (1)
  • Working-Age Population (1)
  • Share of Engaged Workers (1)

Business Costs:

  • Average Annual Employer Contribution to Insurance Premiums (2)
  • Corporate Taxes (2)
  • State Business Tax Climate Index Rank (2)
  • Cost of Living Index (1.5)
  • Median Hourly Wage (1.5)
  • Median Monthly Rental Rate (1.5)
  • Median Income for Self-Employed Individuals at Incorporated Businesses (1.5)
  • Median Income for Self-Employed Individuals at Unincorporated Businesses (1.5)

Texas tops list of best states for starting a small business, best business environment

Overall, Texas came out on top as the best state for starting a small business, as well as the state with the best new business environment. Based on our evaluation, Vermont is the worst overall state to start a small business, while West Virginia has the least favorable environment for new businesses.

California ranks highest for most available resources for small businesses

When it comes to resources for starting a small business, including loans and human capital, California ranked number one. Meanwhile, South Dakota ranked 50th for availability of necessary resources for starting a small business.

Business costs lowest in South Dakota, highest in Vermont

When it comes to costs, South Dakota has the most favorable climate for starting a small business, while Vermont has the least favorable conditions.