The 5 Worst Places to Start a Business

Last Updated Feb 16, 2011 5:12 PM EST

Every year, the Small Business and Entrepreneurship Council compares the tax rates and business regulations in all 50 states (and districts) to determine which are most -- and least -- friendly to small business. Corporate taxes, capital gains taxes, death taxes, health care policy, electricity costs and even the crime rate are some of the 38 factors that help determine the overall rankings.

So which places gave entrepreneurs the least incentive to set up shop in the last year?

1. The District of Columbia
Washington has high taxes across the board -- from personal income to corporate capital gains -- and a high crime rate and high minimum wage. Combine that with the highest rate of state and local government spending and a high percentage of government employees -- factors that are indicative of greater regulation and pull employees away from the more productive private sector -- and D.C. ranks as the worst place to start your business

2. New Jersey
Jersey has the second-highest property tax rate in the country at a 5.09 percent of personal income, along with high utility rate taxes, and poor private property protections.

3. New York
Despite boasting one of the business capitals of the world, the Empire state has some big negatives for entrepreneurs. A large number of health insurance mandates and high taxes -- including big levies on gas and diesel and consumption-based taxes -- make New York a tough place to start up and run a new business.

4. California
Like New York, California has high taxes across the board and a large number of insurance mandates. Business owners in the Golden state also have to deal with high utility costs and high workers' compensation costs.

5. Vermont
Entrepreneurs in Vermont pay high taxes on corporate and personal income, as well as capital gains. Combine that with a high level of state and local employees, and poor private property protections, and Vermont falls to the bottom of the list. One bright spot? A low crime rate.

On the other end of the spectrum, if you're looking for the friendliest place in the country to start a business, head to South Dakota. There you'll find no personal income, capital gains, or death taxes, among other benefits.

To see how your state measures up, see the full Small Business Survival Index.
(Image courtesy Flickr user euthman.)
  • Elise Craig

    Elise Craig has written for BusinessWeek, MarketWatch and washingtonpost.com. She is an alumna of the UC Berkeley Graduate School of Journalism and Georgetown University, and a huge fan of Hoya basketball.

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