As an entrepreneur, starting a business in a state with a favorable business environment can increase your chances of success. Taxes can cut into your bottom line and make it harder for businesses to get off the ground. Starting your business in a state that offers low individual and corporate tax rates can be a smart move. Read on to find the best state to start a business for tax purposes.
How a State Is Considered Tax-Friendly for Businesses?
In addition to considering the best states to form an LLC, how to create an LLC for non-residents, or for starting a business in countries like Canada, Australia, Singapore, or the UAE, business owners need to consider tax implications for their company’s bottom line. Choosing the best states for tax-friendliness can save you thousands of dollars.
The information used to assess each state is based on the Tax Foundation’s State Business Tax Climate Index 2023. This report can help both small business owners and business leaders gauge how each state’s tax system compares to choose the most favorable option. The index suggests how well states structure their tax systems and offers insights into further opportunities.
1. Individual Income Tax
Individual income tax is how much individual taxpayers will have to pay when living in the state. Individual income tax is generally levied on wages, salaries, dividends, interest, and other annual income earned.
2. Sales Tax
Sales tax is important to businesses when choosing a state to start your business because it’s added to the price of goods or services. Higher sales tax can make it difficult for businesses to profit from selling goods. That’s because high sales taxes can drive up the prices, causing consumers to change their buying behavior and purchase less expensive goods or force businesses to lower prices.
3. Corporate Tax
Corporate tax refers to taxes levied on the income or capital of corporations and similar business entities. Corporate tax is imposed at both the federal and state level. State corporate tax can have a significant impact on a business’s profitability.
4. Property Tax
Property taxes can add a significant additional tax burden to businesses, cutting into total profits. For that reason, it’s a key factor in weighing the overall tax environment of a state.
5. Unemployment Insurance Tax
Unemployment insurance tax isn’t levied in all states. The unemployment insurance tax aims to collect unemployment taxes from employers that can serve as a reserve fund from which unemployment benefits are paid to eligible workers. This adds to a company’s tax burden, especially for small businesses.
Best States to Start a Business for Tax Purposes
Understanding the various taxes in consideration, each of the following 10 states rank highly in various tax factors and collectively have some of the most favorable tax policies for small businesses in the US. Here are the top 10 states for tax purposes:
Wyoming takes the #1 spot with no corporate income tax or gross receipts tax. It is also one of seven states without an individual income tax or non-UI payroll tax. Wyoming has well-structured sales taxes (just 4%) and modest excise tax rates.
Wyoming’s average combined local and state sales tax comes in at just 5.36%, which is third in the nation after Alaska and Hawaii. Wyoming does have higher property taxes, but with an overall favorable tax climate, it tops the list.
Ready to get started? Find Wyoming LLC pros and cons, Wyoming vs. Delaware, New Mexico vs. Wyoming, and the advantages of forming an LLC in Wyoming.
2. South Dakota
In second place is South Dakota, which is the only other state that has no corporate income tax or gross receipts tax. It also has no individual income tax or non-UI payroll tax. Although South Dakota scores poorly on the sales tax base subindex, it still ranks second overall for creating a favorable tax environment for individuals and businesses.
Alaska ranks third in the most favorable tax rankings with no individual income or state-level sales tax. Although Alaska’s corporate tax is one of the highest in the nation (9.4%), its 10-bracket structure makes it the worst option in this category. However, with a minimum UI schedule of just 1% and the average state sales tax levied by local governments at just 1.76%, Alaska is a solid all-round choice for businesses.
Business owners find a lot of advantages in the Sunshine State. Florida is famous for having no individual income tax; it also ranks favorably in corporate tax (10th nationally) and property tax (12th nationally). Florida’s top corporate tax rate is just 4.458%, making it one of the lowest in the nation. Find more on starting a Florida LLC here.
Montana has no sales tax, which catapults it to 5th place on this list. It has adopted structural reforms since 2021, which led to a modest reduction in individual income tax, and plans to remove a marriage penalty in 2025 from the state’s income tax code. Montana now scores the best among states that charge an individual income tax base. Taken together, Montana shows both progressive adaptation and a favorable business environment.
6. New Hampshire
New Hampshire also has no state sales tax. In addition, it scores highly in individual income tax rates. New Hampshire is the only state that does not impose a tax on wage or salary income but levies a tax on interest and dividend income.
The good news? Beginning this year (2023), it will phase out interest and dividends tax by one percentage point per year until it is fully repealed by 2027. While New Hampshire has high corporate tax rates, the overall favorable tax environment still makes it a top choice for small business owners.
Nevada taxes wage income, but not unearned income, at a low rate under a non-UI payroll tax, bumping it up in the rankings. Even better, Nevada has a low-rate payroll tax on wage income. Moreover, its payroll tax does not apply to capital income, further increasing its score.
However, it is among the worst states in gross receipts taxes because it does not offer full deductions for either the cost of goods sold or employee compensation.
Utah is a great example of levying taxes of all types but at low rates. It makes the list despite charging all types of taxes due to the low rates on a broad base. It ranks in the top 20 on every type of tax and in the top 10 on individual and property tax.
Indiana, like Utah, levies all major taxes but at low rates. Indiana will cut its flat individual income tax rate from 3.23 to 3.15% in 2023. And, if subsequent triggers are met, the rate could be reduced to 2.9% by 2029, making it one of the lowest individual income tax rates of states that charge income tax. Indiana’s tax system includes three relatively neutral taxes on sales, individual income, and corporate income, giving it an overall high ranking.
10. North Carolina
North Carolina’s rate of 2.5% corporate tax rate is the lowest nationally. In addition, North Carolina has a flat-rate system for individual income tax and scores in the top 10 on low property taxes, bumping it up in the top 10 states that are favorable to start a business for tax purposes.
The Least Tax-Friendly States to Start a Business
The states with the least tax-friendly policies have complex, nonneutral taxes with comparatively high rates. This can include some of the highest property taxes in the country, high corporate income taxes, and high individual income taxes.
Additionally, some of these states aggressively treat international income or levies on inheritance tax. The 10 worst states to start a business for tax purposes are:
- Rhode Island
- New York
- New Jersey
Expanding Your Business
Beyond choosing a business structure and developing a business plan, choosing a state with low business taxes can make it easier to get ahead. When you’re ready to form a new company, doola business formation and compliance services can help. Doola offers business formation and compliance services in all 50 states. You also get your EIN and help to open a business bank account so you can focus on building your core business. Get doola to save more while building your business.
How can I determine if a state has a favorable tax climate for businesses?
You can check the state’s individual income, as well as corporate, property, and sales taxes, and compare them to other states. You can find detailed reports of all 50 states here.
What is the process of registering a business in a tax-friendly state?
To register a business in a tax-friendly state, you’ll need to choose a business entity (usually a limited liability company or corporation) and file it with the Secretary of State. You’ll also need to meet all state requirements, including having a registered agent and office.
Are there any states that don’t have corporate income taxes?
Wyoming, Nevada, and South Dakota don’t have corporate income taxes, although Nevada does have gross receipts taxes.
Are there any states that provide tax incentives for new businesses?
Are there any states that have special tax benefits for specific industries?
There are several states and localities that offer tax benefits for specific industries. For example, Florida offers energy production, film, and insurer incentives. Washington offers incentives for the aerospace industry and manufacturing, among other areas, and San Diego offers incentives for manufacturing and research and development equipment purchases.