Friendliest U.S. States For Small Businesses

Owning your own business can be tough no matter where you live, but location can make a big difference in becoming a success.

Thumbtack, a service firm, performs an annual survey that ranks 95 U.S. cities across all 50 states based on ease of entrepreneurship. Approximately 18,000 small businesses ranked their city in 36 different categories that were combined to assign an overall score and rank. The top 10 cities were perceived as the friendliest U.S. cities in terms of ease of setting up a new business.

According to Jon Lieber, Chief Economist for Thumbtack, state and city governments that promote local business training and focus on ease of regulatory compliance are consistently perceived as being friendliest to small businesses. In turn, entrepreneurs felt that perceptions of their tax burdens were among the least important factors that affect business friendliness.

California and Rhode Island earned an “F” for the fourth time in a row, whereas Texas and Utah again earned an “A+”. In addition to Texas and Utah, small business owners rated New Hampshire, Louisiana, and Colorado as the best places for business. Aside from California and Rhode Island, Connecticut, and Illinois received “F” grades, closely followed by Massachusetts, Maryland and New York, with “D” grades.

If we talk about business regulations, Texas and Utah earn high grades – meaning small business owners view these states as more friendly because of less burdensome regulations. The climate for small businesses in California and Rhode Island is considered difficult due to the burden of regulations, state government and tax climate.

Another factor which was considered for the survey was the percent of taxes on income. States with lower taxes as a share of income are considered friendlier for small businesses. With higher taxation, small business owners did feel dissatisfied; however, the procedural and bureaucratic inefficiencies were perceived as the greater sources of unease. Licensing and other administrative woes always figured high on the concern list. Cities with streamlined procedures were rated as highly as cities that had no formal licensing requirements at all.

Another factor that significantly swayed the opinions of entrepreneurs was the availability of training programs which help explain to small business owners the ins and outs of setting up and running a business. Small businesses, because of their size and nascence, greatly value all support and encouragement they receive from a city or state.

The degree that a region was Internet-savvy was a concern among business owners. This linked to the overall perceptions of approachability and transparency of the city administration. Business owners thus rated cities with well-designed websites much higher in terms of ease of entrepreneurship, as compared with cities with poor or no web presence.

Among the cities surveyed, the five with highest level of state and local government worker unionization received the poorest rank. These were New York (73% unionized, grade D), Rhode Island (71% unionized, grade F), New Jersey (66% unionized, grade C-), Connecticut (64% unionized, grade F), and Massachusetts (61% unionized, grade D+). The linkage between a unionized workforce and hostility to small business is not surprising. After all, a nearly-impossible-to-fire unionized government bureaucrat might well behave boorishly to a would-be business owner trying to complete his licensing forms in quadruplicate.

For economic welfare, it’s important to view whether or not a city or state is viewed as friendly to small businesses. A friendly city will attract more small businesses. It will also help its local workers to make money in the event of an economic downturn by better enabling them to start a small business. Less-friendly cities are more dependent on large employers and could suffer more in an economic downturn.