Although an online business can reach customers anywhere in the world, the state in which the company is based can have a significant impact on its growth and success.

When choosing where to start online businesses, entrepreneurs must consider tax rates and regulations, available financial resources, and infrastructure. However, the relative importance of these factors are evolving based on current events and trends.

“We’ve seen a shift in business dynamics over the last year due to the pandemic,” says Digital Marketing Executive Huy Nguyen. “This is especially true for technology companies. We saw a rapid acceleration in cloud computing solutions and new businesses will have more flexibility from the start. One major advantage tech companies have over brick and mortar is their ability to start a new business in any state they want.”

When it comes to choosing which state, Nguyen says to start with tax and business regulatory climate.

“You can start an online business in a tax-advantaged state without being a resident,” he explains. “Additionally, with more people wanting to work remotely, talent can be sourced from anywhere and your physical location becomes less important.”

Methodology

To create this list of the best and worst states to start an online business, Digital.com compared all 50 states across nine metrics divided into four categories: Taxes, Regulations, Financial Resources, and Tech Infrastructure.

Digital.com graded each metric on a 10-point scale, then averaged the scores together for an overall category score. These scores were then weighted according to importance, based on expert guidance, and each weighted category score was averaged together for an overall score.

The categories and metrics are as follows:

  • Taxes (Weight: 2)
    • Corporate Tax Rates
    • State Business Climate Tax Index Rank
  • Regulations (Weight: 1.5)
    • Small Policy Business Index Score
    • State Commercial and Email Spam Laws
  • Financial Resources (Weight: 1.5)
    • Total Venture Capital Investment, 2019
    • Loan Availability
  • Tech Infrastructure (Weight: 1)
    • Average Internet Speed, in Mbps
    • Broadband Coverage
    • Digital States Survey Grade

Utah tops the list

When looking across all four metrics, Utah came out as the best state in which to start an online business.

The Beehive State is favorable to businesses in terms of taxes, with a relatively low corporate tax rate, and a favorable ranking in the Tax Foundation’s 2021 State Business Tax Climate Index. In terms of business regulations, the state ranked 7th on the 2019 Small Business Policy Index (SBPI), meaning governmental burdens are lighter, thus encouraging entrepreneurship. Utah also scored highly for broadband Internet coverage and good Internet speeds.

Meanwhile, Iowa came in last place, based on a confluence of factors including a high corporate tax rate, a low SBPI ranking, average tech infrastructure, and a lack of available investment capital.

Although there are no stipulations that one has to form their online business in their state of residency, individuals who want to take advantage of favorable conditions in a particular state need to be aware of and adhere to all regulations for licensing, taxes, and other business practices required.

Most favorable tax climate: Wyoming

Although Wyoming ranks 19th overall, it comes in at number one for its tax climate as it has no corporate tax in the state, lifting what can sometimes be an onerous burden for new businesses.

Entrepreneurs looking to avoid high taxes will want to steer clear of New Jersey. The Garden State came in last place in terms of tax environment (and 33rd overall), thanks to its high corporate tax rate.

Most business-friendly regulatory environment: South Dakota

Government regulations on businesses, including licenses, laws, and permits, can be extremely tricky to navigate, especially for business owners just starting out.

Online entrepreneurs who want to avoid these headaches as much as possible may want to look no further than South Dakota, where state-imposed regulations on businesses are few and far between.

Meanwhile, entrepreneurs will face the most challenging regulatory environment in California, which ranked 49th on the SBPI for its numerous government-imposed regulations.

Most available financial resources: California

Online business owners may decide that it’s worth putting up with California’s challenging regulatory environment in exchange for the financial resources available in the state.

The amount of venture capital investment in California is greater than in other states by an order of magnitude. In 2019, there was $65.6 billion worth of venture capital investment in California. New York was in second place with $20.9 billion.

North Dakota is the worst option, with a low rate of venture capital investment and scarcity of small business loans.

Best tech infrastructure: New York

Although tech infrastructure in a particular state may not be as vital as it once was, for entrepreneurs who want to be assured of reliable and fast coverage, New York is the place to be.

The state has one of the highest rates of broadband Internet in the country, and its average Internet speed is also above par.

Wyoming ranks 50th in terms of tech infrastructure. Less than 75 percent of the state has broadband Internet coverage, and Internet speeds in the state are among the lowest in the country.