Best and worst states to start a business for tax purposes

Where you choose to start your business can make or break its future success. To succeed, you need a favorable economic environment and the ability to attract high-caliber customers and employees. Taxes may also be a big factor.

If you're not tied to any one location, consider relocating to one of the best states to start a business. Bear in mind the best states for business taxes may not be the best state to grow a business based on other factors. We will also examine those below. 

1. Wyoming

Wyoming earns the number one spot on this list. It is one of three states that does not impose a corporate or an individual income tax.  

Of course, the state has to get its money from somewhere, which it does via sales taxes. The sales tax rate in Wyoming is low, though, at just 4.0 percent. The state does not impose a tax on prescription drugs or groceries, making it not only tax-friendly for businesses but for residents as well. In terms of a favorable market in which to start a small business, Wyoming ranked number three on FitSmallBusiness's list.  

2. Alaska 

Alaska has no individual income or state-level tax, which is why tax professionals gave it the number two spot on this list. However, Alaska does have a corporate tax rate of up to 9.4 percent for top earners. That said, based on these other factors, Alaska may not be the best state for your business:  

• The high cost of living
• Poor labor market
• Poor quality of life
• The high cost of starting a business

If you enjoy living on the last frontier, building in Alaska may be worth your while. Otherwise, the tax benefits may not outweigh the pitfalls.  

3. South Dakota  

South Dakota, like Wyoming, has no corporate or individual income tax. The reason it falls to number three, however, is because it does impose a sales tax of 4.5 percent. Some cities can set their own rates to 2.0 percent above state rates, as well.  

South Dakota is average in terms of cost of living, market, quality of life and access to capital. However, it's startup costs are low, making it a great place to start a business. 

4. Florida 

Florida does not charge an individual income tax, which is great for LLC members, members of a partnership and sole proprietors. However, it does charge a 5.5 percent corporate tax. Its sales tax rate is slightly higher, at between 6.0 and 8.0 percent.  

In terms of whether or not Florida is a strong market in which to start a business, FitSmallBusiness says it's so-so. It ranks number 20 and achieves average scores in all areas save for access to capital, in which it ranks number 40. 

 5. Montana 

Montana's corporate tax rate is 6.75 percent, with a minimum tax of $50 regardless of earnings. The state charges between 1.0 and 6.9 percent on wage earners' incomes. Montana does not charge a sales tax. Moreover, it is a great state to set up shop due to the low cost of starting a business, the strong labor market and the ease of which business owners can access capital. 

Worst states for small businesses 

While there are other factors you should consider before selecting a state to start your business, tax rates should be a top concern. For this reason, you should steer clear of starting a business in any of the following five states:  

• Arkansas, which has a corporate tax rate of 6.5 percent; an income tax rate of up to 6.9 percent; and a sales tax rate of 6.5 percent.
• Connecticut, which has a top marginal corporate tax rate of 9.0 percent; an income tax rate of at least 6.0 percent; a sales tax rate of 6.350 percent; and an average property tax rate of 2.038 percent.
• New York, which has a corporate tax rate of 6.5 percent; an income tax rate of up to 8.820 percent; and a sales tax rate of 8.875 percent.
• California, which has a corporate tax rate of 8.840 percent; an income tax rate of up to 13.3 percent; and a sales tax rate of 7.250 percent.
  
• New Jersey, which has a corporate tax rate of 9.0 percent; an income tax rate of up to 8.970 percent; a sales tax rate of 6.625 percent; and an outrageous property tax rate of 3.230 percent, the highest in the nation.

Knowing the tax rates in the state in which you wish to start a business is smart financial planning. If you fail to take taxes into consideration, you risk losing more than you gain.