Top States for Business

6 ways states are luring small business

Elaine Pofeldt, special to

With adventure-seeking foodies flocking to his mushroom-foraging tours of the woods in Asheville, North Carolina, Alan Muskat's business, No Taste Like Home, is thriving. Often, he arranges for participants to head to a local restaurant afterward, where a gourmet chef will prepare their harvest.

It's not just the farm-to-table trend that's keeping him busy. It's also North Carolina's business-friendly climate. "The tourism efforts for North Carolina are tremendous," said Muskat, who claims his business has five-figure revenues. Locally, for instance, the Asheville Convention and Visitors Bureau sends a steady stream of tourists to the one-man business he has operated for two decades. "They are my No. 1 source of business," he said.

Read MoreTop States for Business 2015: The list

North Carolina is one of many states that are vying to lure businesses of all sizes—and make them want to stay. For many, the reason is to create jobs and economic growth, given the nation's uneven recovery from the Great Recession.

Dallas, Texas
Kanonsky | Getty Images

Doing so requires a broad mix of policies and conditions that make it easy to grow a business, say experts. Some states dangle low taxes to spark business growth, but that factor alone isn't always the deciding one. California is known for its high taxes. The Tax Foundation says that with its highest individual income tax rate, at 13.3 percent, it ranks highest among all states levying a state income tax. However, California had the highest private-sector job growth—38,900—when ranked by number of jobs in March, according to a report last month by the Joint Economic Committee of the U.S. Congress. It also had the greatest increase in manufacturing employment, with 4,300 people hired in a variety of sectors.

Often, what really moves the needle for a state are efforts that go beyond tax incentives, according to attorney Andrew Sherman, a partner at Jones Day in Washington, D.C., who advises businesses of all sizes.

Read MoreTop States for Business 2015: Our methodology

"There are states that have put a stake in the ground in industry sectors they want to be known for," he said. Iowa is one example. "Iowa is known pretty much as an agricultural state, but it is transforming itself into a pretty robust biotechnology center," said Sherman. "They are putting in a lot of resources at University of Iowa and Iowa State."

Here are six key factors that entrepreneurs and experts say make states competitive in attracting business.

1. A well-educated labor pool. Jeff Ball is the CEO of 45-employee Visio Financial Services, a platform that lends money to private investors based in Austin, Texas. Ball, who previously lived in California, said one reason his firm, founded in 2011, is thriving in Texas is readily available talent. Home to the renowned University of Texas system, the state has an abundant source of the educated workers he needs.

"Our business is really driven by our people," said Ball. "There is a pretty good balance of supply and demand here in Texas." And the cost of living, while not cheap, isn't prohibitive to recent graduates, he noted. "Texas is a pretty affordable place to live," said Ball. "It's an attractive place for millennials to come."

Students at Stanford University in California.
Erin Lubin | Bloomberg | Getty Images

2. Entrepreneur-friendly universities. It's no accident that Silicon Valley has grown up around Stanford University. States that are home to a leading technology research university have historically had an edge when it comes to building a thriving start-up scene, according to Richard Swart, crowdfunding and alternative finance researcher and scholar-in-residence in the Institute for Business and Social Impact at the University of California, Berkeley's Haas School of Business. "That's where the innovation comes from," said Swart. "You have a spillover effect."

The quality of entrepreneurship education offered in a state is also important, said Sherman. "While every state has been anxious to have some type of entrepreneurial education and support system, some have been much better than others," explained Sherman, who serves as an adjunct professor in the MBA programs at the University of Maryland and the law school at Georgetown University. "One example would be Massachusetts," he said. "You have access to the entrepreneurial programming at Babson and Harvard."

The schools doing the most to help their states' economies are keeping the programming grounded in the real world, according to Sherman. If it's overly academic, he said, "that's not useful to entrepreneurs in the trenches."

Read MoreWorkers are the new weapon in the battle for business

3. Abundant financing. Seed money for start-ups is essential for attracting business, said Swart. States known for a high-powered venture capital scene, like California and Massachusetts, have a natural edge in luring entrepreneurs. California had the greatest percentage of venture capital deals in the first quarter of 2015, accounting for 43 percent of all deals, followed by Massachusetts with 12 percent and New York with 11 percent, according to the research firm CB Insights.

But other states are gaining ground, particularly industries where they have a strong presence. Forty-eight percent of the deals took place in states outside of the major technology hubs, such as Missouri, North Carolina, Pennsylvania and Tennessee.

Some states are helping things along. "They invest in their small businesses," said Swart. North Carolina is one example. The One North Carolina Fund offers performance-based matching grants to spark the local economy. It has helped support employers ranging from Cognosci, a Durham-based firm that develops antiinflammatory compounds to fight diseases, to Bennett Aerospace, a defense contractor in Cary.

In Texas it's a lot harder for people to file frivolous lawsuits against you and use the process to extort money.
Jeff Ball
CEO, Visio Financial Services

4. A friendly legal climate. One reason Max Nussenbaum likes running his start-up, Castle, with co-founders Scott Lowe and Tim Dingman in Detroit is that the state has a friendly legal climate. For instance, he has learned that in Michigan, if you take a tenant to court for nonpayment of rent, the judge will usually give them the option to enter into a "consent judgment." They won't be evicted if they pay back rent, plus late fees and legal fees. "They have to pay what they owe, but always have many chances to do so before they get evicted," he said in an email.

The business, which projects $88,000 in revenue this year, is an online property management company. It assists rental owners in finding tenants, collecting rents and coordinating maintenance. "Landlord-tenant law is very fair--neither super tenant-friendly or landlord-friendly," Nussenbaum said.

Similarly, tort reform in Texas has made the state appealing to Ball, at Vision Financial Services, because it lowers his overhead. "In Texas it's a lot harder for people to file frivolous lawsuits against you and use the process to extort money," he said. "That translates to lower insurance costs. For entrepreneurial businesses, that's important."

The cost of complying with existing laws is lower than in his previous home in California, he notes. Here, he doesn't have to be licensed as a mortgage originator, something required in California. "Texas is one of the states that view this as a business transaction," he explains. "That transaction does not need to be licensed to protect either party." That keeps his compliance costs down.

Storefronts in Park City.
Panoramic Images | Kevin Winter

5. Less red tape. In the U.S. Chamber of Commerce annual Enterprising States Study, which measures states' economic performance, Utah was the only state to place in the Top 10 in all six categories considered important. They range from economic performance to entrepreneurship. A recent report by the chamber found that it is seeing job growth as a result of its efforts. For instance, it saw nearly 21 percent growth in middle-skilled jobs, almost 11 times the national average.

One reason Utah's entrepreneurial climate is thriving, noted Swart, is the ease of business formation. "They've moved so much of their process online that you can literally do a company formation and get all the information you need in 10 minutes," he said. "That really is an indication of the extent to which the state is willing to make it easy for entrepreneurs." For instance, its One Stop Business Registration allows owners to set up a single account to manage all of its business registrations with six different agencies, such as the Utah State Tax Commission.

6. The right infrastructure. Every state's future is about millennials, noted Sherman, and compared to older generations, they don't like to own cars. "They want to know they can get around not only in their work life but their personal life, with good, strong public transportation and infrastructure—and not too much traffic," said Sherman. High-speed Internet access, which enables a thriving digital economy, is also a part of the equation to attracting up-and-coming talent.

"It will be hard to attract young people to an area that lacks these things," he said.

For example, four states now have cities offering early access to Google Fiber's 1-gigabit Internet service to small businesses: Texas (in Austin), Utah (in Provo), Missouri and Kansas (in Kansas City).With Google Fiber up to 100 times speedier than traditional broadband, it will be easier for entrepreneurs to experiment with new technologies that rely on fast Internet service.

By Elaine Pofeldt, special to