Starting a small business is hard work anywhere. Business owners have to juggle dozens of important considerations, some of which directly conflict with one another – for instance, it’s hard to have a gold-plated advertising budget when you’re operating on a shoestring. Any entrepreneur who can keep it together for long enough to get a company off the ground and turn a profit deserves the utmost respect.
That said, getting a business off the ground is simpler and less costly in certain locales. Cities and states with fewer barriers to entry for new companies, regardless of industry, are said to be business-friendly or possessing a favorable business climate.
An annual small business owners survey by Thumbtack, an on-demand work platform, sheds some light on what makes for a favorable business climate – as determined by business owners themselves, not policymakers or academics. This survey isn’t exhaustive – plenty of other factors affect business-friendliness, as noted below. Furthermore, the exact mix of elements affecting how easy it is for you to start and run your venture depends on what you do or make.
Factors Affecting the Local Business Climate
1. Licensing and Permitting Requirements
Some economic activities, such as producing and selling alcohol and firearms, are regulated by the Federal Government. To start a distillery or firearm distributor, you need appropriate federal licenses, which can cost thousands of dollars and require hours of numbing application and certification work.
However, most business and professional licensing requirements are location- and industry-dependent. In some areas, local authorities have few such requirements for businesses that aren’t already overseen by federal agencies. Licenses tend to apply only to industries with strict professional standards, such as medicine and law, or those that directly affect public safety, such as construction (which typically involves licensing and permitting). In other places, licensing is much more common.
If local authorities require entrepreneurs in your industry to obtain a business license, it’s one of the first things you need to do. Most licenses need to be renewed at regular intervals as well, anywhere from once per year to once per decade. And if your business does onsite projects in different cities and states, you need to keep up on licensing and permitting requirements in those locations too.
Business licensing and permitting generally comes with financial and time costs. Financial costs range from nominal processing fees of $25 or $35, to three- or four-figure sums for heavily regulated professions and large construction projects, permit costs for which typically depend on the total value of the work. Cities and states sometimes levy redundant fees, increasing total licensing or permit costs.
Time costs for licenses and permits vary widely. Sometimes, it’s simply a matter of filling out and submitting routine paperwork. In other cases, license renewal requires time-consuming coursework that can detract from what’s most important – running your business. The more hoops local authorities require you to jump through to obtain or renew a license, the chillier the business climate is apt to feel.
2. Tax Rates and Business Incentives
No matter where they operate, businesses have to pay local (city or county), state, and federal taxes. Federal tax rates don’t vary from place to place, but local and state taxes certainly do. In high-tax areas, it’s not uncommon for individuals to pay state and local income taxes, businesses to pay state and possibly local corporate taxes, and both to pay local property taxes. For instance, in the city of Boston, business owners who own commercial property must pay $29.52 per $1,000 assessed value in annual property taxes, $2.60 per $1,000 of tangible net business worth, plus 8% gross income in state corporate taxes, and 5.15% in Massachusetts state income taxes (12% on capital gains).
By contrast, the Tax Foundation identifies several states that lack one or more of the major taxes. Notably, Wyoming, Nevada, and South Dakota lack both corporate and individual income taxes. And though businesses usually pass sales taxes onto consumers, states without sales tax – such as New Hampshire and Montana – tend to be more attractive to retailers, restaurants, and other consumer-facing businesses.
Incentives occupy the other side of the tax coin. Many city and state governments offer tax credits, holidays, grants, and other incentives to new and relocating businesses. Some also offer industry-specific tax credits. For instance, the New York City Economic Development Corporation offers local tax credits of $1,000 per employee (up to $100,000 per company) for manufacturing firms that relocate to one of the city’s designated industrial business zones.
Per Reconnecting America, the Federal Government has a slew of grant and tax-incentive programs as well. Some are directly available to for-profit businesses, and others to local governments and nonprofits which may in turn work with for-profit companies. These incentives tend to favor businesses located in downtrodden neighborhoods or struggling cities – rewarding ambitious entrepreneurs willing to invest in places not normally thought of as hubs of commercial activity.
3. Zoning Regulations
Zoning regulations don’t just affect businesses in the process of constructing or expanding their own buildings. They can also affect how and where a business operates within its hometown.
Cities with lighter zoning regulations generally allow more types of business activity in more places. For instance, Houston is infamous for extremely light-touch zoning that, in theory, allows pretty much any business to operate pretty much anywhere – and essentially any type of structure to be built.
According to Houston’s Department of Planning and Development, “The city of Houston does not have zoning but development is governed by codes that address how property can be subdivided. The City codes do not address land use.”
In other words, with enough space and startup capital, you can build a paint thinner factory next to an elementary school in Houston. If volatile chemicals aren’t your forte, Houston’s lax zoning still greatly reduces geographical considerations for your business. You can rent space for your startup in virtually any suitable building without worrying about whether you’re violating local land use codes. In cities with stricter building codes, your business could be relegated to a hard-to-reach industrial park or distant commercial district.
If you’re a sole proprietor running a service business out of a home office or garage, zoning codes won’t affect you too much, even in less forgiving cities. However, they could quickly become an issue as your business grows – local authorities are likely to frown on the increased traffic, noise, parking hassles, and strain on local infrastructure. And if you’re starting a more intense business, such as a manufacturing or logistics operation, you’ll need to lease space in an industrial park right away.
4. Regulatory Environment
U.S. businesses must follow thousands of pages of local, state, and federal business regulations. Federal regulations, such as OSHA workplace safety rules and federal wage regulations, don’t vary from place to place – though specific federal regulations apply only to specific industries or businesses of a certain size.
Some business activities are controlled at multiple levels of government. For instance, the federal minimum wage sets a floor for hourly wages (with limited exceptions for tipped employees, students, and other special groups) for every U.S.-based business. However, many cities and states have higher minimum wages – more than double the federal minimum, in some cases.
In other cases, regulations vary significantly from place to place. According to the L.A. Times, California state law bans new oil drilling rigs along most of the state’s Pacific coastline. Meanwhile, Texas and Louisiana impose essentially no restrictions on offshore drilling rigs in the Gulf of Mexico. And onshore wells are ubiquitous in Texas, including within the city limits of such major settlements as Fort Worth.
5. Public Resources for Business Owners
One of the Thumbtack small business survey’s key findings concerned the gap between entrepreneurs’ expectations and on-the-ground business realities. According to the survey, business owners are willing to pay taxes, comply with local regulations, and obtain appropriate licenses and permits, provided that these requirements are clearly spelled out for them ahead of time and available for on-demand reference.
The easiest way for state and local governments to keep entrepreneurs informed is to maintain up-to-date, comprehensive websites outlining everything – within reason – that business owners and professionals need to know. At this point, pretty much every government has some sort of web presence, but quality varies widely.
For instance, Kentucky’s state government maintains a meticulous array of industry-specific websites that spell out licensing requirements, fees, regulations, government contacts, and other key information (the Kentucky Board of Barbering website is a good example.) By placing relevant rules and regulations in one place, Kentucky makes it easier for business owners to keep track of their obligations.
Local government information databases, such as the “311” systems used by many big cities, are also useful tools. These systems were designed to serve private citizens, but they’re great resources for entrepreneurs looking for information not included on a business-facing websites, such as street closures due to public events, construction, or inclement weather.
6. Local and Regional Amenities
If you’ve ever tried to find the right city or neighborhood to live in, you understand the importance of local and regional amenities. Different people value different amenities, with the precise mix for each person or family dependent on age, lifestyle, marital and family status, and a host of other factors.
Examples include the following:
- Above-average public schools
- Mild or sunny climate
- Lots of open space and opportunities for recreation
- Strong, welcoming social and community networks
- Ample social services, whether public or nonprofit
- Safe streets and communities
- Good internal (roads, public transit) and external (airports, rail, interstate highways) transportation assets
Despite what some tourism slogans would have you believe, no city or region truly “has it all.” However, places with strong amenity mixes – more of the things that entice people to move from afar – tend to attract talent. Entrepreneurs themselves prefer to put down commercial roots in amenity-rich regions. After all, they’re people too.
Colorado’s rapidly growing Front Range metro region illustrates the power of amenities. Stretching for more than 100 miles along the base of the Rocky Mountain foothills, the area includes Denver, its suburbs, several college communities, and many laid-back vacation towns.
With sunny weather and stunning mountain scenery, the Front Range attracts a steady stream of migrants from cloudier, flatter locales – including thousands of talented entrepreneurs, who contribute their talents to its increasingly vibrant software and biotechnology industries. It’s not hard for local companies – nor local government boosters – to convince workers to trade Baltimore or Battle Creek for Boulder.
7. Proximity of Mentors and Competitors
At first glance, trying to build your business alongside hungry competitors doesn’t sound ideal. However, operating in a crowded market can have tremendous benefits, particularly when fellow entrepreneurs approach one another as potential collaborators and strategic partners – not threats that must be eliminated.
Markets with lots of like-minded businesses tend to have well-developed private networks and resources that benefit early-stage companies. Industry-specific business incubators, where new entrepreneurs collaborate with established companies and receive valuable mentoring from seasoned industry hands, are increasingly common. TreeHouse Health, a healthcare startup incubator near my workplace in Minneapolis, is a great example – its early-stage tenants can tap a well-credentialed board of advisors, mentors, and collaborators.
Business incubators, professional networks, and similar resources all encourage entrepreneurs to buy in to the local business community and put down lasting professional roots, strengthening their industries, attracting investment, drawing talented workers, and ultimately raising their region’s profile. In such supportive environments, leaders of mature firms naturally become mentors to promising early-stage companies, perpetuating a virtuous cycle.
8. Native Fundraising Resources
Access to capital is just as important to early-stage companies as mentorship and professional support networks. It’s also critical for firms looking to expand their operations or move into new markets. While traditional banks exist everywhere, they’re unwilling to lend to entrepreneurs with untested ideas and limited revenues. In many cases, even established businesses struggle to find adequate credit.
The funding problem is particularly acute in cutting-edge industries such as software, biotechnology, and advanced manufacturing. If you’re in a cutting-edge field, you can benefit greatly from access to deep-pocketed angel investors and venture capitalists capable of funding costly but necessary pre- and post-revenue activities like research, development, and marketing.
Certain cities and regions are well-known for robust fundraising resources. Nice weather isn’t the only thing that draws entrepreneurs to places like Boulder and the San Francisco Bay Area, after all. Both places are crawling with VCs and angel investors.
Equity crowdfunding platforms, which connect entrepreneurs with potentially thousands of investors willing to invest relatively small sums in their ideas, are worth exploring as well. While many equity crowdfunding platforms operate coast to coast, others – such as Localstake and PeerRealty – are restricted to certain states or markets. Businesses that can tap both enjoy a leg up on the competition.
9. Depth of the Local Talent Pool
Some areas are blessed with an ample supply of talented workers hungry to put their skills to work for ambitious entrepreneurs – or become entrepreneurs themselves. The presence of major research universities and laboratories, a long history of specialization in a particular industry, and strong professional networks all contribute to deep regional talent pools.
Some areas are known for attracting talent of a particular nature. If you’re starting a business that requires a particular type of expertise, local labor force characteristics could well determine where you choose to locate.
For instance, part of the Bay Area – Silicon Valley – is world-renowned for attracting the best and brightest software and technology minds. Thanks to an incredible cluster of biotech firms and major research universities like M.I.T., the Boston area is probably the best U.S. region to start a life sciences business. Talent is sometimes drawn to unexpected locales too: The top-tier veterinary medicine school at Iowa State University and the flagship location of the National Veterinary Services Laboratories make low-key Ames, Iowa, one of the country’s best places to go into the animal health business.
10. Competition for Talent
Keep in mind that a deep talent pool doesn’t automatically translate to fast, easy hiring. Your city or region could have many talented, diligent workers – but if lots of other companies want to hire those workers, you’re going to need to compete against them.
Generally, that means offering candidates higher starting salaries, better healthcare and fringe benefits, more vacation time, more office perks, and other sweeteners. All of these things cost money.
11. Cost of Living
Though cost of living is more often viewed as an issue for individuals, it directly affects the cost of starting and running a business too. For instance, CNBC’s annual Top States for Business ranking typically finds a close correlation between cost of living and cost of doing business.
Most notably, your area’s cost of living affects how much you need to pay your employees to keep them well-fed – and encourage them not to seek higher-paying work at a nearby competitor. In high-cost areas, business supplies and inventory can be more expensive as well, particularly in areas with high transportation costs, such as Alaska and Hawaii. High cost of living affects your personal wealth too – all other things being equal, you’re likely to spend a much greater share of your company’s profits on housing, food, and childcare in New York City than in Oklahoma City.
12. Labor Union Membership and Activity
Although labor union membership has been declining for years, unions are still influential in certain industries and regions. Even if your workers aren’t themselves unionized, local union activity in your industry is likely to push up your labor costs – independently of factors like living costs and competition for talent.
Automotive manufacturing is a perfect example. In Michigan, Ohio, Ontario, and other Midwestern jurisdictions, most auto and auto parts plants remain unionized. As a result, workers generally earn higher wages and enjoy more comprehensive benefits, even when they don’t belong to a union. According to Bloomberg, the average U.S. hourly labor cost of the heavily unionized General Motors, including benefits, is $58. Nissan, whose U.S. manufacturing base is located in the union-unfriendly South, averages $42 per hour.
Aside from auto manufacturing, which isn’t the industry of choice for most small-scale entrepreneurs, unions are active in industries like shipping and logistics, plumbing, carpentry, and other building trades, as well as lower-wage industries like food retailing and distribution, particularly in the Northeast and Midwest. If you’re starting a business in an industry known for union activity, avoid legal action and other adverse consequences (such as picketing) by following local best practices – and be sure to budget more for labor.
Keep in mind that the business climate factors that most affect your company are likely to change as the company matures. In the early going, you’re likely to value local funding and mentorship above regional amenities, since you’re probably going to be working most of the day anyway. As time goes on, transportation infrastructure (key for a growing company) and zoning regulations could matter more.
Just as every individual has a slightly different conception of the “perfect weather,” every business thrives in a slightly different business climate – and there’s no standard, agreed-upon recipe for business-friendliness. In 2014, Texas – a low-tax, low-regulation state with below-average education and quality of life measures – earned the number-one rank on CNBC’s Top States for Business rankings. In 2015, the top spot went to Minnesota – a high-tax, high-regulation state with excellent education and quality of life measures. Entrepreneurs in Houston and Minneapolis both have a leg up on competitors elsewhere – just in very different ways.
Bottom line: If you’re contemplating going into business for yourself, think about the factors most likely to determine your company’s success or failure – and remember that it pays to plan ahead.
What factors are most important to your business or business idea?