Starting a business can be an exciting and fulfilling endeavor, but it can also be a daunting task. The rising cost of living is a major concern for many aspiring entrepreneurs, and it can be overwhelming to think about all the expenses involved in setting up a new business.
From renting premises and workspaces to paying corporate income taxes, the cost of starting a business can vary greatly from state to state. To help entrepreneurs make an informed decision on where is best to launch their startups, the team at Switch on Business have analyzed numerous metrics to find out most and least expensive states to start a business. The study has looked at key metrics such as corporate income tax rate, average cost of renting serviced offices, and the average living wage.
Top 10 most cost effective states to launch a startup
Our index analysed metrics from corporate tax and LLC fees to living wages in each state to rank each state within our index on how much, on average, it would cost to set up a business.
South Dakota ranks top overall as the cheapest state to launch a startup, and is one of the six US states that doesn’t impose corporate income tax. South Dakota’s living wage is also the lowest in the country at $14.85 per hour. Entrepreneurs looking to start a business that is labor intensive should perhaps consider setting up their business in a state such as South Dakota to save on labor expenses.
Business owners will also find affordable workspaces in South Dakota with the average rent for a serviced office being just $249.00, and it costs just $150 to register an LLC.
Mississippi follows closely in second place thanks to its super-affordable office rentals; a fully serviced office space could cost startup founders as little as $96.50 per month on average. In addition to this, filing an LLC costs just $52, which is almost a third of what it costs in South Dakota. However, a corporate tax rate of 4.5% is levied against all businesses.
|Ranking||US State||Corporate tax rate (%)||LLC filing fee ($)||Average monthly price for serviced office space ($)||Living Wage - Annually ($)||Living Wage - Hourly ($)||Number of other SMEs being set up||Other SMEs being set up (per 1000 people)|
Arkansas earns third place with the cheapest LLC filing fee in all of America, at just $45. Entrepreneurs may also be attracted by the state’s relatively low living wage of $15.55 per hour, which means employers should be able to find skilled employees to run the business while keeping labor costs down.
Wyoming is the fourth best state to launch a startup with an hourly living wage of $15.25 and LLC registration fees totalling $102. Wyoming also joins South Dakota as the second state in our top 10 with a 0% corporate tax rate. However it could be a high-competition environment for startups to enter with there being 57.73 SMEs per 1,000 people living in the state.
Ohio, another corporate tax-free state, rounds off the top five. The living wage is a reasonable $15.61 per hour and entrepreneurs can register an LLC for just $99.
The 10 least cost effective states to launch a startup
At the other end of the scale, our analysis also revealed the 10 most expensive states to launch a startup.
Filing an LLC is more expensive in Massachusetts than in any other state with costs totalling $520. Employing staff here also comes at a high cost with the living wage in this state sitting at $21.88 per hour. Additionally, the corporate tax rate is set at 8% making it the least cost-effective state to launch a startup.
Although New York may seem an ideal location for a new business to launch due to its strong economy and high volume of consumers, The Empire State actually ranks second from the bottom. Unsurprisingly, renting an office in New York is more expensive than in any other state with the monthly rent for a serviced office space averaging $1,466.30 each month. Entrepreneurs will also need to pay their employees more due to the high living wage ($21.99 per hour) and businesses are taxed at a rate of 6.88%. However, filing an LLC costs a reasonable $200 – which could be seen as a redeeming quality.
New Jersey follows just behind New York, ranking as the third most expensive state to launch a startup. Though it only costs $130 to file an LLC, Corporate tax is levied at 8.63%. The average cost to rent a serviced office space here is $1,314.17 ($152.13 cheaper than across the Hudson River in New York).
California comes in fourth, and although it only costs $70 to register an LLC, entrepreneurs will lose 8.84% of their earnings to corporate tax. California also has one of the highest living wages in America at $21.82, which pushes labor costs up significantly.
Our study reveals that Minnesota is the fifth most expensive state to set up a business in America. Though this state hasan affordable hourly living wage ($17.74) and an LLC filing fee of $155, businesses registered in Minnesota lose almost a tenth of their earnings to the government thanks to its 9.8% corporate tax.
These are the 10 least cost effective states to launch a startup:
|Rank||US State||Corporate tax rate (%)||LLC filing fee ($)||Average monthly price for serviced office space ($)||Living Wage - Annually ($)||Living Wage - Hourly ($)||Number of other SMEs being set up||Number of other SMEs per 1000 people|
The business industries with the highest survival rates
It’s often mentioned that a high percentage of startups fail within the first three years – on average, 20% of small businesses fail within the first year, 30% by the end of the second year, and around 50% by the end of the fifth year.
There are several different factors that influence how successful your business could be, and the industry you choose to enter is key. To discover which types of startups have the best chances of long-term survival we’ve analyzed what percentage of the businesses which started trading in 2019 are still up and running today.
Despite the challenges posed by the pandemic, 93.9% of the health care and social assistance businesses established in 2019 are still in operation today, making it the most successful sector for startups in the past three years.
Agriculture, forestry, fishing, and hunting businesses have a 76.4% survival rate, while real estate, rental, and leasing businesses follow with 73%.
|Industry||Percentage of businesses opened in 2019 still trading in 2022|
|Health care and social assistance||93.90%|
|Agriculture, forestry, fishing, and hunting||76.40%|
|Real estate and rental and leasing||73.00%|
Which startups are least likely to make it past the three-year mark?
While some sectors have thrived over the past three years, others have struggled – none more than the mining, quarrying, and oil and gas extraction industry. More than half (55.9%) of the startups launched in 2019 within this field have stopped trading, and this could potentially be attributed in part to climate change concerns.
Just 56.6% of information startups (such as businesses specializing in computer programming, system design, or telecommunications), have made it past three years, and 61.6% of administrative and waste service companies (such as businesses that offer services such as hiring and placing of personnel, cleaning and so forth).
|Industry||Percentage of businesses opened in 2019 still trading in 2022|
|Mining, quarrying, and oil and gas extraction||55.90%|
|Administrative and waste services||61.60%|
If you are thinking about setting up a business and have any queries about what you need to know, you can find the latest tips, and guidance for entrepreneurs on our blog at Switch On Business.
Sources & Methodology:
Starting with a seedlist of all 50 states and their populations, data was collected from the following sources and a weighted index formula was applied to create the overall ranking.
Corporate tax rate in each state
Number of other SMEs being set up
To find out the sectors where startups have seen the most success since being established in 2019, a seedlist of all sectors was ranked from highest to lowest according to this source.