Most Challenging States to Start a Business In

Starting a business is an exciting journey, but choosing the right location can make all the difference in the organization’s success. While some states have processes and qualities that make it easy to start a business, others may present more hurdles and challenges when founding a new company. That doesn’t mean businesses can’t operate there; it just means doing a bit more due diligence. You may even notice that some of these states are very popular and economically prosperous locations. Luckily, in addition to compiling the basics of starting an entity in all 50 states, we’ve highlighted the five states to which to pay particular attention. 

California

California is one of the most dynamic business states but has significant advantages and challenges. It is the most populous state, ensuring a large and diverse consumer base. California also has major industries like technology (Silicon Valley), entertainment (Hollywood), agriculture, and tourism. Conversely, California has exceptionally high real estate, labor, and operational costs compared to other states. Stringent employment laws, environmental regulations, and zoning requirements add business compliance burdens.

Challenges

• Higher corporate (8.84%) and individual (1% - 13.3%) income tax rates
• $800 minimum franchise tax requirement for most entity types
• Higher sales tax rate (7.25% base state rate) 
• Higher minimum wage ($16.00)
• Extremely high business competition 

Perks

• Low initial filing fees
• Low annual report fees
• Internationally influential markets

Costs

Review all the basics when starting a business in California via our Startup Costs tool; a summary of basic business costs by entity for all states mentioned in this article can be found at the bottom. 

New York

New York is an international icon for people and businesses alike. It’s home to one of the world’s largest metropolitan areas, creating opportunities for diverse companies. Thriving industries include finance (Wall Street), technology (Silicon Alley), fashion (NYFW), and healthcare. However, NY has some of the highest taxes in the country. Similar to California, the real estate and labor costs in New York are significantly higher than in other states. For businesses that can overcome these challenges, the state offers a thriving environment for growth and innovation.

Challenges

• Higher corporate (6.5 - 7.25%) and individual (4% - 10.9%) income tax rates
• Minimum annual franchise tax
• Higher sales tax rate (state rate of 4% but rate of 8.875% in New York City, where many businesses operate) 
• Higher minimum wage ($15 - 16.00)
• Cost of living, especially in NYC, can impact the recruitment and retention of employees.
• Foreign entities must register with the state via mail

Perks

• Low annual report fees
• Acts as a gateway to international markets, with strong trade links and infrastructure like ports and airports
• Internationally renowned universities and research centers

Costs

Review all the basics when starting a business in New York via our Startup Costs tool; a summary of basic business costs by entity for all states mentioned in this article can be found at the bottom. 

Hawaii

Hawai’i’s natural beauty and laid-back lifestyle can appeal to business owners and employees alike, making it another popular choice for setting up a business. The state's thriving tourism industry provides opportunities, especially for companies catering to visitors, like hospitality, food services, and retail. However, its remote location and distance from the continental United States mean increased costs and access to a smaller consumer base (although not mentioned in the most challenging list, honorable mention Alaska will also face similar challenges).  

Challenges

•  Average corporate income tax (4.4-6.4%). High individual income tax (1.4% - 11%) and cost of living/operational expenses
• Higher minimum wage ($14.00)
• Every business in the state needs a General Excise Tax License (GET), the cost of which varies by industry. 
• High shipping costs and potential delays
• Off-peak season challenges for those businesses that rely on tourists. Additionally, the susceptibility to extreme weather events during different seasons can cause catastrophic effects for residents and businesses, as seen in the wildfires on Maui in 2023. 
• Hawaii is more committed to sustainability than other states, which benefits businesses in the long term but may involve more upfront costs that must be budgeted. 

Perks

• Low initial filing fees
• Low annual report fees
• No franchise tax
• Efficient Secretary of State (SoS) online system

Costs

Review all the basics when starting a business in Hawaii via our Startup Costs tool; a summary of basic business costs by entity for all states mentioned in this article can be found at the bottom. 

Pennsylvania

Pennsylvania provides a balanced business environment with access to diverse industries and strategic location advantages. The state’s central location on the East Coast makes it ideal for businesses requiring easy access to major markets like New York City, Washington, D.C., and Philadelphia. Compared to neighboring states like New York and New Jersey, Pennsylvania also offers more affordable commercial and residential real estate options. However, it also comes with challenges like complex tax structures and complicated compliance requirements. 

Challenges

• One of the highest corporate income tax rates (8.99%)
• Higher payroll tax (1.419 - 10.3734%) 
• Higher variation in other taxes, like property taxes or local taxes. For example, Philadelphia has its own Business Income & Receipts Tax (BIRT). Each local jurisdiction may also have its own compliance requirements, so it’s important to check with your local office. 

Perks

• Low annual report fees (there are currently no annual report fees in Pennsylvania, but starting in 2025, some entities will be required to pay $7 for annual reports).
• The state boasts a well-developed transportation network, including highways, railways, and ports.

Costs

Review all the basics when starting a business in Pennsylvania via our Startup Costs tool; a summary of basic business costs by entity for all states mentioned in this article can be found at the bottom. 

New Jersey

New Jersey’s proximity to other major metropolitan areas, skilled workforce, and robust infrastructure makes it an appealing place to start a business. Thriving sectors include pharmaceuticals, manufacturing, logistics, technology, and finance. Its connection to the Atlantic Ocean makes it home to Port Newark-Elizabeth, one of the busiest container ports in the U.S. However, high costs and a complex tax environment can pose challenges, especially for small and medium businesses. 

Challenges

• One of the highest corporate income tax rates (a maximum of 9%)
• Higher individual income tax rate (1.4% - 10.75%) 
• $500 minimum annual fee for corporations
• Higher minimum wage ($15.13)
• Since 2022, New Jersey has banned plastic bags and foam food service products, which may change costs for food service businesses.
• High cost of living and operational costs
• Coastal businesses risk damage from hurricanes and severe weather events, which have become more severe and frequent in recent years. 

Perks

•  Reasonable annual report fees
• The New Jersey Economic Development Authority (NJEDA) offers state business incentives and programming, especially for sustainable or green initiatives. 

Costs

Review all the basics when starting a business in New Jersey via our Startup Costs tool; a summary of basic business costs by entity for all states mentioned in this article can be found below. 

‍