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Best And Worst States For Small Business

NEW YORK ( TheStreet) -- Location, location, location. It's the mantra real estate agents live by, but can also be vital for small businesses.

States differ wildly on various tax and business-specific programs that can make or break a business, especially a small start-up.

Whether it's because of the startlingly high numbers of workers out of jobs or just a tactic to bring revenue to suffering state fiscal budgets, many states are increasingly courting small businesses and start-ups. The conventional wisdom says small businesses create two-thirds all jobs.

"The climate for a start-up almost anywhere frankly is about as positive as I have ever seen it," says Dr. Charles "Chuck" Morrissey, an associate professor at Pepperdine University's Graziadio School of Business and Management.

In Rhode Island, for instance, state Rep. Donna Walsh (D-36), who is on the state's House Committee on Small Business, introduced a bill Jan. 19 to eliminate the corporate tax for many small businesses.

The legislation would eliminate Rhode Island's minimum corporate tax, now $500 for firms grossing less than $250,000 annually, and set up a graduated tax system based on gross receipts. "Besides equity, its greatest benefit is to provide tax relief for small businesses and start-ups to whom every dollar counts," Walsh said in a statement.

Ideally for small businesses, states could compete to be known to be as welcoming to them as Delaware is to larger firms. Delaware claims to be where more than 50% of all U.S. publicly-traded companies and 60% of Fortune 500 companies are incorporated.

The state is pro-business and shareholder friendly, with modern corporation statutes and well-developed case law that facilitates business planning; a helpful state legislature; and a nonjuried Court of Chancery dealing specifically with corporate issues.

Once firms get beyond $20 million to $25 million in annual revenue, they should consider changing to a corporation, says Mariano Sori, a state taxation expert at True Partners, but small businesses that intend to expand can also take advantage of the environment.

Morrissey, who led Pepperdine B-school's entrepreneurship program, notes that many student business plan lack "location strategy," which could be detrimental to a start-up's success.

"In many cases the business models assumed they would be in a location that would be start-up friendly," which isn't always the case, Morrissey says.

"It's no coincidence that the Apples (AAPL - Get Report) and Googles (GOOG - Get Report) just happen to come from very few areas," he says.

TheStreet is highlighting the five best and worst states for small businesses as compiled by the Small Business & Entrepreneur Council as part of its annual Small Business Survival Index, released in December.

The index ranks states by their public policy climates for small business and entrepreneurship, measuring the costs and burdens of state government on small business and looking at policy areas that enable competitiveness and growth.

Low labor costs and a lack of corporate income tax are common denominators in the best states, while the opposite is true for some of the worst states, experts say.

"A lot of states have instituted programs for small businesses, or even large businesses, that want to relocate to the state," Sori says, citing grants, tax credits and temporary property tax reductions. When entrepreneurs can choose where to base a business, things to look at include corporate income tax rate, property tax and the sales tax burden.

The top and bottom five, according to the council:

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