Most small companies aren't simply looking for the cheapest place to do business, Ubalde says. Instead entrepreneurs tend to ask where they can find the best workers,, as Rousselle did. That's why cities like New York and San Francisco remain attractive despite their high costs, Ubalde says.
Aside from the labor pool, tax rates differ significantly from state to state, and they may be more important for small businesses with few employees. S-corporations and other companies that don't pay corporate income taxes can benefit from states that have low personal income tax. Moving from California to Washington state, for example, could save a small business owner 9% or 10% of taxable income, according to data from the Tax Foundation, a nonprofit Washington, D.C. research group.
Haphazard Approach Not Uncommon
Areas with low taxes often also have lower costs, and the combination can entice entrepreneurs who are priced out of places that are more in-demand, says Tax Foundation economist Josh Barro. "If you're looking for a place where you can start your small business with reasonable costs, you might not be able to do it in New York or New Jersey, but you might be able to do it in Florida," he says. (For a look at the Tax Foundation's list of 25 states with the lowest projected tax rates for 2009, flip through this slide show.)
Those small businesses in a position to create jobs can appeal to local economic development groups for help. Blaine Kern, CEO of forensics lab Human Identification Technologies, found an expansion site in September in Kirkesville, Mo., through Site Selection Network. The Mission Viejo (Calif.) company offers a free service that distributes proposals from companies to 162 economic development groups, who pay for membership in the network. Kern plans to hire between 100 and 200 workers there over the next five years. His current lab, in Redlands, Calif., has fewer than 20 employees and around $7 million in revenues. "If you look at our ability to lower price point and increase profit margin, the labor pool in Missouri is about 41% less expensive when it comes to salary," he says. That's savings on top of refundable tax credits from the state.
Small business owners have long taken a haphazard approach to choosing a location, says ZoomProspector's Ubalde, which puts them at a disadvantage. That might be a minor drag in good times, but in a downturn it can mean the difference between survival and failure. "For some businesses it's the difference of literally millions of dollars each way in affecting the bottom line," Ubalde says.
Tozzi covers small business for BusinessWeek.com.
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