What U.S. States Have the Most Economic Freedom?

Starting a successful business can be challenging for many reasons.

This explains why the U.S. Small Business Administration report found that nearly half of new startups fail within the first five years.

Regardless, several factors determine a business's success and failure.

While some of these factors are related to product quality, planning, management, and pricing, others depend on external factors.

In the U.S., the business environment is an important factor that determines every business' chances of success. Interestingly, regional policies, infrastructure, availability of skilled personnel, operational cost, tax codes, and other factors that determine business success vary from one state to another.

Based on these metrics, it is evident that some states provide a better business environment than others.

Which State is the Most Business-Friendly?

As mentioned, various metrics are used to determine the most business-friendly state. 24/7 Wall St. used a 42-point weighted index to compare the business potential of various states.

The measures are classified into eight categories, which include:

1. Business costs
2. Availability of labor
3. Skill level
4. State regulations
5. Technology
6. Cost of living
7. State infrastructure, and
8. Quality of life.

Data used to evaluate these measures was sourced from the Bureau of Economic Analysis, The Tax Foundation, and the Bureau of Labor Statistics.

Massachusetts ranked as the best business-friendly state based on these 3 measures. The state topped this list for many reasons. Among them include a skilled and well-educated labor force and an increased number of innovative startups.

Which States are Best for Small Business Owners?

If you are unsure where to center your small business, below are 6 of the best states that favor small businesses.

Recent political and macroeconomic events may have changed the business friendly status of these states. But they may be worth investigating based on your goals, focus and network. And if your state didn't make this list, contact your state’s Secretary of State, your state’s business portal and your state’s department for economic development.

Ask them for information and why they prioritize what they do. Ask them what kinds of things can be done to improve the business environment, but be clear on the items as most government staff do best acting on the minutiae. Also, you can get involved with the Chamber of Commerce and local manufacturers groups as many have team that work on the local business climate.

As of the most recent reporting term, here are some of the more friendly business states:

1. Utah

• 1-year real GDP change: +3.7% (8th best)
• Avg. earnings per job: $52,364 (14th lowest)
• Adults with a bachelor’s degree (34.9% (13th highest)

Interestingly, among the top five best states for small businesses, four are located west of the Mississippi River. Utah is the first of the four states for various business-friendly reasons. For starters, startups and small businesses drew more venture capital investment compared to other states. From the statistics above, the state drew almost $1.2 billion in venture capital funding, which surpasses per capita of other states.

2. Colorado

• 1-year real GDP change: +3.5% (10th best)
• Avg. earnings per job: $61,617 (15th lowest)
• Adults with a bachelor’s degree (41.7% (2nd highest)

Colorado is the third best state for small businesses, ranking slightly behind its neighbor. What makes Colorado rank highly on this list is its high percentage of a well-educated workforce. More than 42% of Colorado's adult population have a degree. This means that a shortage of skilled labor won't be a problem for budding businesses. Besides, the population of working citizens is projected to surpass 10.5%, which is more than double the 4.6% projected national growth rate.

3. Washington

• 1-year real GDP change: +5.8% (the best)
• Avg. earnings per job: $71,390 (5th highest)
• Adults with a bachelor’s degree (36.7% (10nd highest)

Small businesses in Washington may benefit from low operating costs. For instance, the average cost of electricity is 8 cents/kWh, which is less than most states. A Tax Foundation analysis also found that the state has a favorable tax climate that favors small businesses with limited capital.

Currently, technological innovations are behind Washington's economic growth. The state gained 99 patents for every 100,000 people, which doubles the 50/100000 national rate. That said, tech businesses are more likely to prosper in this state.

4. North Dakota

• 1-year real GDP change: +3.6% (9th best)
• Avg. earnings per job: $56,681 (23rd highest)
• Adults with a bachelor’s degree (29.7% (21st  lowest)

North Dakota is the best state for small businesses in the Midwest and among the best nationally. Unlike Washington and Massachusetts that rank for other reasons, small businesses in North Dakota benefit highly from excellent infrastructure. Less than 8% of roads are in average or poor conditions, which is way below the nationwide share of 21.8%. Congestion is also minimal, which benefits the trucking industry.

5. North Carolina

• 1-year real GDP change: +2.4% (25th best)
• Avg. earnings per job: $55,086 (21st lowest)
• Adults with a bachelor’s degree (31.9% (20th highest)

North Carolina is the best state for small businesses towards the south. What makes the state best for small businesses is the low cost of starting and running businesses. Like Washington, the cost of electricity is somewhat low compared to most states. The Tax Foundation also commended North Carolina for its favorable tax climate.

6. Virginia

• 1-year real GDP change: +2.6% (18th best)
• Avg. earnings per job: $63,281 (11th highest)
• Adults with a bachelor’s degree (39.3% (6th highest)

Great technological innovations and a favorable regulatory environment make Virginia another good state for small businesses. More than 9% of residents in the state work in STEM fields. Besides, Virginia is among the states with more bachelor's degree attainment rates.

Even though some states ranked better than others in terms of overall business climate, some elements need improvement.

Besides, there is no single state with strengths in all parts of the index.

All states have their fair share of weaknesses.

For instance, Massachusetts may be one of the most business-friendly states, has a large pool of talented workforce, but it has a very high cost of living.

As more people work remotely than ever before through ecommerce, 3PL, outsourcing, freelancing and online agency work, additional metrics may be needed to evaluate the state you chose to call home for business purposes which may include filing fees, taxes, corporate structure requirements, networking opportunities, banking, and ease of working with state regulators.

Regardless, you are invited to be part of the Your Strategic Marketing Partner email list where we discuss these great topics and more on a regular basis.