Every dollar counts when you’re starting a new business. Some U.S. states are more expensive than others for entrepreneurs, which can make a big difference if your new venture takes some time to get off the ground, as many do.
Perhaps unsurprisingly, California and New York are the two most expensive states for starting a new business, according to a ranking published last month by online small business advisor SimplifyLLC. Both states have above-average corporate income tax rates and costs of living, which affect both commercial rent and the salaries you might need to pay to attract and retain employees.
Businesses in California — home of Silicon Valley, a longtime startup hub — pay the third-highest corporate income tax rate in the nation, 8.84%, and the second-highest average commercial rent, at $31.78 per square foot, the ranking noted, citing data from the National Association of Realtors. Californians also pay some of the highest electricity prices in the country, and the state boasts the highest number of regulations aimed at businesses, according to the report.
Here are the ranking’s 10 most expensive states and districts — including Washington, D.C. — for starting a new business:
- California
- New York
- Hawaii
- Tennessee
- Massachusetts
- Alabama
- New Jersey
- Washington, D.C.
- Illinois
- West Virginia
Southern states like Tennessee and Alabama ranking fourth and sixth, respectively, on the list might be more surprising. Neither is typically known for high costs of living, and both states have a 6.5% top corporate income tax rate, which is the national average, according to the Tax Foundation.
However, they have low labor participation rates, both below 60%, and a relative lack of available talent can make it more expensive for businesses to recruit and retain the best workers. Both states also ranked in the bottom 10 for their small-business lending environments, based on loans handed out by the Small Business Administration. A lack of available funding can make a new venture more costly and risky.
DON’T MISS: How to start a side hustle to earn extra money
Money concerns are typically the biggest reason prospective entrepreneurs decide against starting a new business. And running out of money, whether due to unforeseen obstacles or slower-than-expected initial sales, is the most common reason businesses fail.
“You have got to put yourself in a situation that no matter what happens, you can pay your bills,” personal finance expert and bestselling author Suze Orman told CNBC in 2021.
If you’re looking for a cheaper place to put down stakes for a new venture, SimplifyLLC ranked Utah the least expensive U.S. state for starting a business. Still, California and New York remain popular startup destinations for a reason: Despite their high costs, they typically boast access to a highly-skilled and educated workforce, and proximity to large, established industries and wealthy customer bases.
SimplifyLLC’s ranking considered a range of factors, including corporate income tax rates and business filing fees, the cost and availability of workers, average costs of commercial rent and utilities, and the overall health of each state’s business environment.
The website calculated its ranking using data from the Census Bureau, the Bureau of Labor Statistics, the Federal Reserve, the National Association of Realtors, the SBA and the Tax Foundation, according to the report.
Want to earn some extra money on the side? Take CNBC’s new online course How to Start a Side Hustle to learn tips to get started and strategies for success from top side hustle experts. Sign up today and use coupon code EARLYBIRD for an introductory discount of 30% off $97 (+taxes and fees) through April 1, 2025.
Plus, sign up for CNBC Make It’s newsletter to get tips and tricks for success at work, with money and in life.
