For the second year in a row, cities in the South give entrepreneurs the best chances to keep their startup costs low, while big cities remain among the most expensive places to start a new business, new research finds.
The study from SmartAsset revealed that nine of the 10 cheapest cities to start a new business in are in southern states, including three in Tennessee.
To find the cities with the lowest startup costs, SmartAsset collected data on the typical costs of starting and running a business in 80 of the largest cities in the United States. They calculated the total expected startup costs over the first year of operation for a company based on five factors:
- 1,000 square feet of office space.
- The cost of gas and electricity for a 1,000-square-foot office.
- The average cost of filing fees for either incorporation or filing as an LLC.
- Legal and accounting fees.
- Payroll costs for five full-time employees, earning the city's median annual salary.
Topping this year's rankings of the most affordable cities for startups is Chattanooga, Tennessee. The city is attractive for entrepreneurs looking to save money because of its relatively low costs for office space and employee payroll. The research shows that it would cost $225,442 for a business owner with five employees and a 1,000-square-foot office to run a first-year startup there. That's up about 2 percent from a year ago when the costs were $221,000. [See Related Story: 15 Important Startup Lessons for New Entrepreneurs]
"If you decide to start a business in the Gig City, you'll be in good company," the study's authors wrote. "Many startups and accelerators operate there, including the Lamp Post Group and Gigtank 365."
Overall, the 10 most affordable cities to launch a startup in are:
- Chattanooga, Tennessee: $225,442
- Wichita, Kansas: $232,057
- Greensboro, North Carolina: $232,326
- Columbia, South Carolina: $232,541
- Knoxville, Tennessee: $232,620
- Little Rock, Arkansas: $233,877
- Memphis, Tennessee: $234,524
- Lexington, Kentucky: $234,945
- Orlando, Florida: $236,513
- Winston-Salem, North Carolina: $237,983
Similar to a year ago, many of the 10 most expensive locations for startups are larger cities, including three in northern California: San Jose, San Francisco and Oakland.
For the second year in a row, San Jose and San Francisco are ranked as the two costliest cities to launch a business in. San Jose, where costs rose 3.9 percent from 2015, has the most expensive payroll and legal and accounting costs of the 10 cities with the highest startup costs, while San Francisco had the third highest office space and legal and accounting costs and second highest payroll expenses.
This year's 10 cities with the highest startup costs are:
- San Jose, California: $439,831
- San Francisco, California: $422,455
- Washington D.C.: $395,017
- New York, New York: $384,389
- Boston, Massachusetts: $378,436
- Bridgeport, Connecticut: $356,853
- Oakland, California: $346,241
- Seattle, Washington: $345,615
- Trenton, New Jersey: $336,611
- Newark, New Jersey: $328,396
While they are considerably more expensive, entrepreneurs shouldn't necessarily rule out starting a new business in any of these cities.
"After all, many of the startups that have become household names are headquartered there," the researchers wrote. "There's also something to be said for the talent pools in these areas."
A complete breakdown of the costs for each city in the five areas examined can be found on the SmartAsset website.