California ranks third for starting a business

LOS ANGELES

November 2, 2015 5:17am

•  Survival rate is highest of any state

•  "Shows the strong entrepreneurial spirit of California residents"

With two in five working Americans wanting to own their own business, where is the best state to launch it? Washington, it turns out, according to a study by the online personal finance website GOBankingRates.com. But California does well, placing third in the study.

California has the highest business survival rate of any state, with 3.5 times more businesses created than closed in 2013, the study says. “This boom in new business shows the strong entrepreneurial spirit of California residents, as does its high density of startups (141 per 100,000 residents),” it says. California has the second-largest pool of potential employees and one of the highest unemployment rates in the nation, according to the data collected for the study. Entrepreneurs might have an easier time of securing funds in the Golden State compared with other states, however, because the state has the fifth-highest rate of small business loans (80.6 per 1,000 small business employees), the study says.

Small businesses in California have to face some of the highest business taxes and one of the highest costs of living in the country. The state's overall attractiveness, lending opportunities, and business survival rate, however, are enough to rank California No. 3 on the list. The report ranks the state of Washington first.

Washington offers small businesses a high chance of survival, second only to California, the report says. In 2013, the number of businesses founded in the state was 3.5 times the number failed businesses. Washington has a high per-capita GDP of $60,476 and the sixth-lowest business tax climate score in the nation, which indicates a solid economic and business foundation for new business growth, it says. “Other factors that help make Washington the best state for entrepreneurs is the state's large pool of available employees, equal to 5.8 percent of the state's population, and a high rate of small business lending. Even with Washington's higher-than-average cost of living, new companies can thrive in this state,” it says. "Any entrepreneur who has the flexibility to set up shop where he or she chooses should certainly consider doing so in one of the 10 states we found that help small businesses thrive," says Cameron Huddleston, who writes the GOBankingRates' Life + Money column. "There are plenty of factors in each of these states that boost the chances of success."

Other highlights of the report include:

• High Costs of Living: No. 2 worst state for entrepreneurs, Hawaii, has the highest cost of living in the nation and is burdened by high business taxes, making it difficult for new business owners to thrive.

• Local Business Climate: Wyoming ranked as the No. 2 best state for entrepreneurs due to the its high per-capita GDP, availability of employees, and state small business loans, which all contribute to a healthy climate for new businesses.

• Higher Education: California, Massachusetts and Delaware, all of which rank on the "best" list for entrepreneurs, boast higher college education metrics with greater percentages of students graduating from university.

While the best states help new businesses thrive, the worst states for entrepreneurs have a number of drawbacks that can make it hard for business owners to achieve success, the report says. Building a strong business in these states isn't impossible, but entrepreneurs thinking of striking out on their own should be aware of the possible obstacles a small business could face in these areas and have a plan to overcome them.

And the worst state to start a business? “West Virginia is the worst state for entrepreneurs, and that’s reflected in its high rate of failed businesses and low number of existing small businesses,” the report says. For every 100 new businesses created in West Virginia in 2013, 117 businesses failed, the highest rate of business deaths in the nation, it says. Not that West Virginia had many small businesses to begin with — just 63 per 1,000 residents, the lowest of any state.

West Virginia's startup density is just 81.4 per 100,000 residents, the lowest in the nation. That number isn't likely to change much in the near future if the state maintains its current rate of small business lending, which is the second-worst rate in the nation. West Virginia does have a couple of favorable factors, such as its available workforce and higher percentage of college graduates, which are slightly better than average. Even with these positives, however, West Virginian entrepreneurs have far greater obstacles to overcome in order to achieve success than business owners in any other state.

Methodology

Methodology: GOBankingRates considered nine factors to rank all 50 states on the strength of existing small businesses and startups, as well as how favorable the state's business climate is to entrepreneurs. All data was sourced on Oct. 15, 2015.

To measure existing businesses and startups, GOBankingRates looked at three factors: (1) the startup opportunity of the state, (2) the number of existing small businesses per capita, (3) and the survival rate of small businesses. Startup opportunity data (1) was sourced from The 2015 Kauffman Index: Startup Activity Report on State Trends and measured the rate of new entrepreneurs in the state, the portion of new entrepreneurs who were employed before starting a business, and the density of startups in the state. Data on existing small businesses (2) was sourced from the 2015 Small Business Profiles for the States and Territories from the U.S. Small Business Administration and ranked states based on the number of small businesses and small business employees in the state per capita. Lastly, the survival rate of small businesses (3) for each state sourced data from the Bureau of Labor Statistics' Business Employment Dynamics by State reports and was calculated by measuring the ratio of business creations to business deaths in 2013, the most recent year for which there is complete data.

GOBankingRates also measured how favorable a state's business climate is to new entrepreneurs by measuring (4) productivity in the state, (5) availability of employees, (6) education level of potential employ