Study: Best States for Entrepreneurs

By Tina O

Study Methodology

Every entrepreneur needs at least a few things:

a decent startup environment,
a good supply of affordable business advisers,
a low sales tax to keep costs and prices down, and
a whole lot of coffee and booze to provide their hardworking employees – and themselves – with stamina in their quest for growth.

So we first looked at the change in the number of firms with fewer than 20 employees between 2007 and 2011 (the most recent available from the U.S. Census) for each state. Notably, every state but two (New York, which made our list, and North Dakota, which didn't) experienced declines, making this largely a contest of which state dropped the least. The average change was a 6.19% drop.

Next, we factored in the state sales tax rates as of January 1, 2013, according to the Federation of Tax Administrators. Five states have no sales tax; of those that do, the average state sales tax is 5.59%.

Support will go a long way when entrepreneurs are trying to get their business off the ground, so we zeroed in how many SCORE chapters each state has. These groups (the acronym stands for the Service Corps of Retired Executives) are comprised of retired businesspeople who volunteer their time to mentor other businesspeople. There are over 300 chapters in the United States (every state has at least one chapter; Florida has the most), and entrepreneurs can get everything from free business counseling to workshops and seminars, as well as a shoulder to cry on.

Speaking of crying, we know that entrepreneurs work horrendous hours, so easy access to coffee can be a lifesaver. Plus, a meeting over a cup of joe can also help you get clients: According to a Yale University study, people tend to be more generous and caring when they have a warm beverage in their hands. A one-on-one meeting at a nearby cafe could go a long way toward winning someone over. And like it or not, booze frequently plays a role in successful business transactions as well. You will likely come across clients who expect to be both wined and dined and employees who expect to have a stress-relieving party every once in a while. To find the states with the best supplies of liquid courage, we used U.S. Census numbers to calculate the number of "snack and nonalcoholic beverage bars" (read: coffee shops) and liquor stores per capita. Rhode Island wins this category (there's either a liquor store or a coffee shop for every 1,700 people there), but because of its big drop in viable small businesses in recent years and relatively high sales taxes, it didn't make the list.

10 Best States for Entrepreneurs

1. Florida

Orlando, Florida

Change in number of firms with <20 employees: -7.01%
State sales tax: 6%
SCORE chapters: 22
Coffee shops and liquor stores per 1,000 people: 0.19

Where else in the world can you actually sit on the beach, work on your business, and visit The Happiest Place on Earth all in the same day? Oh, California, you say? Yes, but in Florida the state sales tax is much lower, you have just as much access to top-notch – and free – business advice, and the rent is cheaper (about $22.41 per square foot compared to $29.35 in California). Bonus: fewer Kardashians.

2. California

San Francisco, California

Change in number of firms with <20 employees: -4.76%
State sales tax: 7.5%
SCORE chapters: 20
Coffee shops and liquor stores per 1,000 people: 0.31

Silicon Valley – yes, we know. But California is more than just Palo Alto's backyard. When all those Zuckerbergs peter out on their social-media ventures, guess what they’ll do with their time? Help you. With the second-most SCORE chapters in the country (Florida is first), California is a great place to tap into some of America's brightest minds. Of course, the costs here are more challenging because the sales tax and rents are so high, but you'll have a tan and access to roughly twice as much caffeine and alcohol.

3. New York

New York, New York

Change in number of firms with <20 employees: 0.48%
State sales tax: 4%
SCORE chapters: 18
Coffee shops and liquor stores per 1,000 people: 0.32

Despite its reputation as an anti-business state, New York is only one of two states that didn't experience a drop in the number of businesses with fewer than 20 employees between 2007 and 2011. For that, it gets big points. Couple the viability of smaller companies with a huge amount of free business advice, a low base sales tax, and plenty of places to wear out a Starbucks card or stock up your party fridge, and you have a formula for taking a huge bite out of the Big Apple.

4. Pennsylvania

Philadelphia, Pennsylvania

Change in number of firms with <20 employees: -4.72%
State sales tax: 6%
SCORE chapters: 18
Coffee shops and liquor stores per 1,000 people: 0.3

Pennsylvania gets big points because entrepreneurs have access to a ton of seasoned executives who are willing to help the newbies’ businesses grow. Small businesses there have also weathered the recession relatively well. Must've been the cheesesteaks – or the beer (the state has one of the highest amounts of coffee shops and liquor stores per capita).

5. North Carolina

Charlotte, North Carolina

Change in number of firms with <20 employees: -7.39%
State sales tax: 4.75%
SCORE chapters: 13
Coffee shops and liquor stores per 1,000 people: 0.15

North Carolina has struggled to keep small businesses in the state, but with a 4.75% sales tax and 13 SCORE chapters, entrepreneurs should be able to set up shop here easily. The one thing we don't like? It's 48th in the nation for coffee and liquor stores per capita. Depending where you set up shop, you may have to put a Keurig in the office and smuggle that whiskey in from Tennessee.

6. Iowa

Des Moines, Iowa

Change in number of firms with <20 employees: -4.91%
State sales tax: 6%
SCORE chapters: 12
Coffee shops and liquor stores per 1,000 people: 0.18

Like its reputation, Iowa wins the award for "most wholesome" on our list. It's done a relatively good job of keeping small businesses in the state, it has a lot of help available, and the cost of doing business is neither too high nor too low. If we could give it a hug, we would.

7. Illinois

Chicago, Illinois

Change in number of firms with <20 employees: -4.16%
State sales tax: 6.25%
SCORE chapters: 11
Coffee shops and liquor stores per 1,000 people: 0.25

Stuck in the "polar vortex," Illinois is hard to love sometimes. But it's not a bad place to launch your American dream, because there are a lot of other entrepreneurs willing to stick around and build that dream with you. And when the proverbial cloud cover has you wishing you could just crawl into bed, you'll have a decent shot at finding a coffee shop to reenergize you.

8. Indiana

Indianapolis, Indiana

Change in number of firms with <20 employees: -7.61%
State sales tax: 7%
SCORE chapters: 11
Coffee shops and liquor stores per 1,000 people: 0.25

There's more to Indiana than the Colts and the Hoosiers. As we highlighted in Best Cities for Young Couples, Indiana is a great place to live. But it's also a great place to start a business. You can set up an office relatively inexpensively (the average rent is only $17.30 per square foot) and find people to teach you what you need to learn.

9. Texas

Houston, Texas

Change in number of firms with <20 employees: -0.35%
State sales tax: 6.25%
SCORE chapters: 10
Coffee shops and liquor stores per 1,000 people: 0.17

The entrepreneurs in Texas have to be some of the scrappiest in the country, because the state has managed to keep so many of them in place with relatively little access to help from SCORE. Of course, SCORE is not the only place to turn for free business advice, but with a slightly higher sales tax and not a lot of "liquid courage" available per capita, this is a huge do-it-yourself crowd. We now know: don't mess with Texas…or its entrepreneurs.

10. Ohio

Columbus, Ohio

Change in number of firms with <20 employees: -8.70%
State sales tax: 5.5%
SCORE chapters: 10
Coffee shops and liquor stores per 1,000 people: 0.24

Ohio is a long way from #1 Florida and #2 California. For one thing, you won't have the beach outside your window - you'll have four feet of snow. But considering that you'll also pay less in sales tax and be able to meet your clients’ entertainment expectations, we think it's worth it.

Other factors, such as the particular city or town in which you set up stakes and your access to the clients or customers you want to attract, should be weighed before deciding where to start a business. For instance, check to see whether the city you’re considering has any additional sales taxes imposed on businesses.

Business conditions affect the success of even the best entrepreneurial ideas. So if there's one lesson to take from this list, it's that you should care about where you start your business. We also have another: access to liquor can be a plus when you occasionally need to entertain but you should, of course, always drink responsibly and be sure those around you do as well. This leads us to our last point we learned from our research: Don't open a liquor store or coffee shop in Rhode Island. That little state has enough already.

Tina O is a contributing writer at CreditDonkey, a credit card comparison and reviews website. Write to Tina O at tina@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.