As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every state in America. In this installment, we asked a few of North Dakota's roughly 70,000small business owners about the challenges and opportunities of operating in their state. Here's what they had to say.
Turbulence from the steep decline in global energy costs has hurt the North Dakota economy, but in most other respects the state's economic performance is remarkable. In 2015, the North Dakota's economy contracted, but in the years before that, growth was explosive. Although the state is heavily reliant on the energy sector – North Dakota accounts for 12.5 percent of U.S. crude-oil production – entrepreneurs have found plenty to be optimistic about.
Despite the shock of the oil crash, the state still boasts a low tax burden and is now seeing a turnaround from the spiking unemployment. The per capita personal income in the sparsely populated Peace Garden State is exceptionally high, reaching $54,376 compared to the national average of $47,669 in 2015, according to the U.S. Bureau of Economic Analysis. Both the oil crash and the fertile environment were at the forefront of local entrepreneurs' minds when they spoke with Business News Daily about the challenges and opportunities they face in their state.
Low tax burden
North Dakota's tax burden is low and manageable for the entrepreneur. The state maintains a five-bracket personal income tax system with a top marginal rate of 2.9 percent, the seventh lowest in the country. North Dakota's corporate income tax is a three-bracket system topping out at 4.31 percent, again the seventh lowest in the country. A roughly standard 5 percent sales tax is also administered by the state. Scott Peterson, director of governmental affairs for sales tax compliance company Avalara, said North Dakota's sales tax bears some unique traits that are worth considering beyond just the rate.
"North Dakota has a very traditional, almost old-fashioned sales tax," Peterson said. "They predominately tax tangible personal property. They don't tax digital goods, and they use destination sourcing for their local taxes."
These major taxes contribute to an overall tax burden of 9 percent, according to the Tax Foundation, which is lower than the U.S. average tax burden of 9.9 percent.
High per capita personal income
Anytime more people have more money on hand, it's a good thing for entrepreneurs. North Dakota's per capita personal income of $54,376 is 14 percent higher than the national average, while the state's cost of living is just 5 percent higher than the national average. And the state's low tax burden helps keep money in residents' pockets as well. Taken together, this means more disposable income for residents, which likely means more revenue for businesses.
Small business hotspot
North Dakota might be a small state, but even so, it ranks first in the number of startups per capita. Small business owners and aspiring entrepreneurs are finding that North Dakota offers the opportunity and support that combine to create a sense of initiative and innovation. This has led to more small business creation in a state with less than a million people than anywhere else in the U.S.
"Even with a decline in oil activity, bigger cities in North Dakota have the infrastructure that's attractive to small businesses," Brian Jackson, owner of the Bismarck-based Mighty Missouri Coffee Co., said. "Construction was big, and with it, a lot of convenience businesses have opened for business — the food trucks, delivery businesses, etc."
"There is ample opportunity for someone who has vision and is willing to work for it. We have fairly abundant resources at the state and local levels to help us," Katy Kassian, owner of Buffalo Gals Mercantile and a central North Dakota farmer, said. "If you look outside of the major cities … there is so much to offer in these smaller communities. Most of them will bend over backwards to get you and keep you."
Uncertain economic future
Historically, North Dakota experienced very stable economic growth. From 2000 through 2007, state GDP seemed to be growing at a relatively healthy pace, culminating with a massive boom in 2008 when the economy grew by 9.8 percent. Much of that drastic increase could be attributed to the oil boom, which kept North Dakota's economy growing throughout the recession that followed the 2008 financial crisis. After the recession, the massive growth continued, with annual percent changes reaching double digits two years in a row. Now, however, that growth has subsided; 2014 brought just a 2 percent increase over 2013, and the economy actually contracted by 2.1 percent in 2015. This has dampened entrepreneurs' optimism, but many said they've managed the downswing very well.
"The state of the economy is, overall, pretty decent," Kassian said. "I believe too many chicks were counted before they hatched, with the oil boom. [There was] too much growth, too fast in some areas, which has now left buildings empty and not enough customers to support all the new businesses."
"There has definitely been an economic downturn from the oil activity over the past 10 years," Jackson added, "and with it, an unfortunate downturn in optimism for starting things up. But that's not to say we haven't seen our fair share of success stories."
According to the U.S. Census Bureau, North Dakota ranks 47th in the country in population density. While many cite the small population as a boost to quality of life, it also makes doing business a bit more difficult, particularly for brick-and-mortar operations. With so few people so spread out, businesses have to consider how they can reach a larger market and also strategize the most cost-effective way to deliver their goods or services over a large area.
Luckily, this has become less of a challenge as transportation and communication technologies have improved. In the past, reaching distant customers would be very difficult and costly, but today, physical location matters less for many types of businesses. And those North Dakotan entrepreneurs who are bound by physical location still have the advantage of appealing to their local communities' interest in supporting their neighbors instead of massive chains.
Filling open positions
Another consequence of the oil boom was the difficulty of staffing small companies. With such lucrative positons in the energy sector, many people were unwilling to work for more modest wages. Moreover, the small population means competition for reliable employees can be stiff and limited based on geography.
"The challenge you hear most from small businesses in this area is finding help," Jackson said. "For a while, it became a challenge to compete with energy jobs. Plenty of businesses that were doing well had to shut their doors because they just couldn't keep it staffed."
Now, following the oil crash, unemployment has spiked from an impressive low of 2.6 percent to a still comparatively impressive 3.1 percent. Although that rate is low by most other states' standards, it means thousands more workers entered the job market. During this same time, the labor force has been growing, offering entrepreneurs a larger pool from which to select candidates.
Resources for small business in North Dakota
If you're a small business owner in North Dakota looking for resources to help you move forward, here are a few organizations you might want to investigate.
North Dakota SCORE
SCORE's volunteer business professionals and expert "mentors" give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in North Dakota.
U.S. Small Business Administration (SBA) District Offices
The U.S. SBA offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.
North Dakota Small Business Development Centers
North Dakota hosts a number of development centers for small business. Each of the centers is dedicated to supporting the development and retention of small business, helping entrepreneurs do everything from craft business plans to navigate the state's tax code. You can find your region's small business development center at the link below.