Question 1

Which states are best for forming an LLC?

Accepted Answer

From a pure-cost standpoint, states with the lowest LLC filing fees (often under $50) and no annual franchise tax are friendliest to new entities. But total tax burden and corporate income tax usually matter more in year two onward. The ranking weights the long-run factors more heavily than one-time filing costs.

Question 2

What's franchise tax and why does it matter?

Accepted Answer

Franchise tax is an annual flat or formula-based fee a state charges for the privilege of operating a corporation or LLC there. Some states (Texas, California, Delaware) have meaningful franchise tax obligations; many have none. The flag here marks states with any form of franchise tax regardless of size.

Question 3

Why include unemployment rate?

Accepted Answer

Small businesses need to hire from a local labor pool. Low state unemployment means tighter labor markets (harder to find workers, higher wages); high unemployment means easier hiring but also weaker consumer demand. The lower-is-better direction here reflects that most small business owners we surveyed prioritize hiring ease.

Question 4

Where does the business climate rank come from?

Accepted Answer

The Tax Foundation publishes an annual State Business Tax Climate Index ranking all 50 states (1 = most competitive overall). It composites corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax structures. We use the most recent 2025 release.

Factor	Weight	Direction	Data source
Business Climate Rank	25%	Lower = better	Tax Foundation 2025 State Business Tax Climate Index (rank 1 = best)
Low Corporate Tax	20%	Lower = better	policy_small_business corporate income tax top rate
Low LLC Filing Fee	10%	Lower = better	State Secretary of State LLC formation fee (small business)
No Franchise Tax	10%	Higher = better	policy_small_business has_franchise_tax flag (no franchise tax scores higher)
Low Total Tax Burden	15%	Lower = better	Tax Foundation state and local tax burden (% of personal income)
Strong Labor Market	20%	Lower = better	BLS Local Area Unemployment Statistics (state-average unemployment rate)

#	State	Business Climate Rank	Low Corporate Tax	Low LLC Filing Fee	No Franchise Tax	Low Total Tax Burden	Strong Labor Market	Overall
1	South Dakota	98	—	75	100	65	100	82
2	North Dakota	84	75	78	100	58	87	80
3	Wyoming	100	—	86	100	73	77	80
4	Florida	94	59	81	100	62	71	77
5	Missouri	71	79	97	100	60	64	75
6	Montana	92	42	100	100	47	79	74
7	Utah	80	71	96	100	38	73	74
8	Indiana	82	67	87	100	60	59	73
9	Arizona	67	67	97	100	56	60	70
10	Colorado	55	74	97	100	53	57	68
11	Georgia	59	60	86	100	60	68	68
12	Idaho	69	56	86	100	55	62	68
13	North Carolina	73	100	81	0	53	67	68
14	New Hampshire	90	32	86	0	58	92	65
15	Oklahoma	65	79	86	0	63	73	65
16	Iowa	61	37	97	100	37	82	64
17	Michigan	76	52	97	100	53	37	64
18	Nebraska	35	54	86	100	40	90	62
19	Virginia	45	52	86	100	38	81	62
20	Mississippi	63	66	97	0	56	71	61
21	Tennessee	86	45	43	0	85	69	61
22	Texas	88	—	43	0	67	60	58
23	West Virginia	51	45	86	100	49	49	58
24	Kansas	43	38	73	100	47	72	57
25	Wisconsin	47	26	80	100	40	80	57
26	Ohio	39	—	86	100	48	53	56
27	Pennsylvania	57	18	81	100	44	67	56
28	Alaska	96	5	54	100	100	0	55
29	New Mexico	31	53	97	100	43	52	55
30	Nevada	78	—	91	0	56	32	53
31	Oregon	53	30	86	100	29	53	53
32	Hawaii	20	47	97	100	12	81	52
33	Arkansas	37	62	98	0	45	64	51
34	South Carolina	41	66	84	0	58	53	51
35	District of Columbia	—	21	86	100	37	37	48
36	Kentucky	49	66	99	0	51	25	48
37	Vermont	16	18	81	100	26	92	48
38	Maine	33	12	70	100	30	72	47
39	Maryland	14	21	86	100	27	81	47
40	Alabama	24	45	65	0	59	74	45
41	Washington	8	—	65	100	42	44	44
42	Louisiana	27	32	86	0	62	48	41
43	Minnesota	6	0	78	100	22	76	38
44	Delaware	22	15	88	0	34	68	36
45	Massachusetts	12	25	0	100	40	60	36
46	Rhode Island	18	38	75	0	33	58	36
47	Connecticut	10	32	82	0	20	—	30
48	Illinois	29	4	75	0	35	47	30
49	New York	0	35	65	0	0	65	27
50	New Jersey	4	11	81	0	27	51	26
51	California	2	13	92	0	23	30	22

Best States for Small Business

How we scored each state

Full 51-State Ranking

FAQ

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