As part of our yearlong project "The State of Small Business," Business News Daily plans to report on the small business environment in every U.S. state and the District of Columbia. In this installment, we asked some of the more than 681,500 small business owners in the state about the advantages and challenges of operating in Virginia.
In 2012, Virginia's GDP stood at $424 billion. It had received accolades from Forbes Magazine in 2006 and 2007 as having the best climate for business in the United States in terms of economic growth, business costs/incentives and quality of life. MSNBC also ranked it as the top state for business in 2007. But how much has changed for the Commonwealth of Virginia since then?
According to the U.S. Small Business Administration, as of 2016, small businesses make up 46.9 percent of the private workforce in Virginia, employing 1.5 million of its 8.33 million residents. Among seven classes that are designated by the U.S. Census Bureau's Business Dynamics Statistics (BDS), Virginian companies that employed 250 to 499 employees experienced the largest gains in the fourth quarter of 2015, adding 6,162 net jobs. This may sound daunting to smaller business owners who are competing with federal contractors, but companies that employed one to four employees added 2,009 net jobs in that same quarter. That means that a prime place for growth beyond 2016 is within the smallest BDS Class (that is, between one to four employees), wherein Virginia's diverse workforce provides an abundance of talent in many sectors.
In the third quarter of 2015, the SBA reported that Virginia grew at an annual rate of 1.2 percent, which was slower than the overall U.S. growth rate of 1.9 percent. Hoping to spur growth for the future, the state's lending institutions issued 119,426 loans below $100,000 (for a total value of $1.7 billion) in 2014 under the Community Reinvestment Act, according to the Federal Financial Institutions Examination Council.
Diverse entrepreneurial community
One crucial advantage Virginia provides is a robust economy for an increasingly diverse population. Virginia's Survey of Business Owners reported that the state's minority-owned businesses grew 33.6 percent from 2007 to 2012, with Hispanic- and Pacific Islander-owned enterprises recording the highest growth, at 53.5 percent and 49.6 percent, respectively. Virginia contains only 1 percent of the nation's Hispanic population, yet it claims 3.6 percent of the companies that are listed in the Hispanic 500 directory. Much of this growth has been attributed to a surge in immigration from the people of Guatemala, Honduras, El Salvador and Nicaragua to the Greater Washington Metro Area.
The addition of law firms specializing in immigration, churches, restaurants and public advocacy centers make up part of the growing Central American population in the area. The greater Washington area is home to an estimated half-million immigrants from Central America, making it the second-largest such concentration of people from that part of the world in the nation; Los Angeles is in the lead. Thriving communities in Woodbridge, Manassas Park, Sterling, Lorton, Dumfries and Fairfax City are choice Virginia locations for enterprises that wish to establish themselves in familiar company.
African-American business owners also make up a substantial part of Central Virginia's economy, with Richmond and Petersburg weighing in as important cultural and economic hubs. The Central Virginia African American Chamber of Commerce (CVAACC) has extensive listings for minority-owned enterprises in a variety of sectors. According to its website, CVAACC's footprint covers the 16 counties and four independent cities that make up the Richmond Metropolitan Statistical Area.
Richard Davis, president of CVAACC and Richmond's first African-American fire chief, advocates for a greater reach of equal opportunity within the Commonwealth of Virginia. Davis spoke about the importance of CVAACC's role within the African-American community: "Conduct[ing] seminars, networking events and forums that will help our small businesses and other business professionals increase revenue. These meetings within the community are engineered to help African American businesses in the region connect with potential customers." African-American-owned businesses seeking to relocate to Central Virginia can contact CVAACC at firstname.lastname@example.org.
Niche locations with strong business potential
In specific locations within the state, Virginia provides a favorable blend of labor and clientele for businesses. Employers have discovered that caches of talent that are most suitable to their businesses' needs are concentrated in different areas. For example, electoral advocacy groups and boutique law firms thrive within the Beltway; defense contractors can be found in Reston's Innovation Center or Hampton Roads; bakeries and cafes are concentrated in Alexandria, Staunton, Richmond or Norfolk's Ghent District; manufacturers and logistics companies are attracted to Loudon, Prince William, Henrico, Chesterfield, Wise or Suffolk counties; family farms abound in the towns of Delaplane and Kilmarnock as well as in Isle of Wight County; and the recreation and hospitality industries are flocking to scenic vacation spots like Virginia's Eastern Shore, the Blue Ridge Mountains, the Northern Neck, the Greater Washington, D.C., area and Colonial Williamsburg.
Businesses need to conduct due diligence when they're choosing their location, however, so that they can make the best decision about whether their best interests lie in operating in an unincorporated part of Virginia's 95 counties, or whether they should stay within the confines of Virginia's 35 independent cities or find real estate somewhere in between. The larger towns and independent cities of Virginia may or may not include their own municipality taxes on receipts, capital gains or other assets. Between larger conglomerates and microbusinesses, proprietors looking to relocate to Virginia have to conduct extensive research when they're deciding on a niche location for their business.
Proximity to Washington, D.C.
Entrepreneur Jeb Ory, CEO of Phone2Action, recently found his niche location within the state of Virginia. A civic engagement software company, Phone2Action's business model depends on proximity to organizations and federal entities, to connect citizens' concerns with public servants. Ory relocated from the District of Columbia to a dense cluster of office space south of the Potomac River, in Arlington County's Rosslyn District – cushioned by a $6 million investment through Gov. Terry McAuliffe's office.
Business speculators heralded the move as a smart way to grow; they claimed that it filled in gaps with regard to Arlington County's property vacancy rate. According to Daniel J. Sernovitz of the Washington Business Journal, Phone2Action took advantage of a void in northern Virginia: The region was hit hard by the Pentagon's Base Realignment and Closure plan, an "impact compounded by sequestration and government austerity measures." Where debate over appropriations of government spending was affected by Washington gridlock, Gov. McAuliffe looked to the private sector to fill in the gaps for Arlington, which is still a relatively stagnant part of northern Virginia. Through the efforts of public-private cooperation, Phone2Action recently landed $4.7 million in Series A funding and is expected to double its workforce in 2017, furnishing at least 142 new tech jobs.
Ory called his locale a prime place for political advocacy companies, nonprofits and federal contractors, because of its proximity to D.C. as well as to talented job candidates coming from Reston, Rosslyn and the District itself. Phone2Action was able to offset a third of the costs for expansion, property taxes and capital gains, through Governor McAuliffe's patronage and Arlington County's need for dynamic businesses. Above all, Ory considers that the prioritization of each location and where it serves and underserves is the best bellwether for a business's success: "Where you locate needs to speak to access to your region's best talent without paying a premium on the cost of property," he told Business News Daily.
Ory also said that Phone2Action's unique position in receiving assistance stemmed from "a density of great technology talent, an immensely skilled workforce and the nexus of talent having easy access to work." These were all readily apparent in Virginia, and Ory could also draw talent from the hubs of Maryland and D.C.
If Phone2Action sounds like a unicorn among prospective businesses that relocate to Virginia, it probably is. Few companies have found justification for a niche relocation that's sponsored by a sitting state governor. However, that shouldn't discourage smaller businesses from considering the Commonwealth as a new place to establish their companies.
Complex taxation laws
Virginia comes with its own inherent risks and obscure taxation laws for small businesses. For restaurants and cafes, taxation is generally set at around 5 percent (4 percent state tax and 1 percent local tax), but the tax rate on food that is purchased for home consumption is 2.5 percent (1.5 percent state tax and 1 percent local tax). For hybrid concepts, like delicatessens, butcher shops and carryout stores, business owners must do extensive research into each municipality's tax code.
Virginia's Retail Sales and Use Tax Code is the most comprehensive and complex in the country, covering a vast array of what is rendered as liable under the Department of Taxation. For the adventurous agriculturalists wishing to hawk their wares at farmers markets and roadside stands, "sales of agricultural produce and eggs are exempt from tax when such items are raised and sold by an individual at retail in local farmer's markets and at roadside stands, provided that the annual income from such sales by the agricultural or egg producer do not exceed $1,000." Within the hospitality industry, a fee is imposed on the "in-room rental or purchase of digital media offered in guest rooms rented out for continuous occupancy for fewer than 90 days, such as hotels and motels," which is especially relevant for bed-and-breakfast arrangements.
Virginia's taxation renders all companies who garner revenue from the state as liable, and does not give home-rule privilege to companies that are receiving federal contracts to operate in other states but that retain Virginian ownership. Virginia designates a business as a "pass-through entity" if that company is doing business in Virginia or has income from Virginia sources; consequently, that business is therefore required to file an income tax return with the Department of Taxation for each taxable year. Pass-through entities include Subchapter S corporations, partnerships, limited-liability companies (LLCs), electing large partnerships and business trusts.
Uneven distribution of labor and traffic
Roughly 43 percent of Virginia's population is situated in three counties: Fairfax, Arlington and Prince William. This uneven distribution of population means that northern Virginia is heavily skewed in terms of a workforce, whereas it may be harder to find talent in rural areas. Turnover in the urban reaches may be attributed to poor work-life balance, traffic fatigue or the region's high cost of living. Cost-effective talent may have to commute along the I-95 corridor, which is among the most congested roadways in the country.
Talented workers may benefit from the prospect of "reverse commuting" to workplaces in the outer counties of metropolitan regions. The Dulles Toll Road is a high-employment corridor that's relatively far from the D.C. region's core. Suburban communities such as Tysons Corner, Fair Oaks, Shirlington and Ashburn are also major centers for employment in retail and entertainment. There are also significant challenges for businesses servicing Fort Belvoir Army Base, Mark Center community and Stafford County, which lack the transportation services to absorb those commuters.
Congestion is a major factor in deciding a location for your business. Virginia commuters may seem like a reliably patient bunch, but job candidates from other regions may need to get used to spending a significant amount of time in traffic, especially near major choke points like the Hampton Roads Beltway and I-264.
Many employers participate in programs that are designed to limit the number of solo drivers at rush hour. Federal contractors can take advantage of a monthly transit benefit that subsidizes Washington's Metro rides and for parking at Metro stations. Employees can take advantage of a pretax deduction that can be subtracted from their salaries to pay for transit use. Programs such as NuRide and Pool Rewards offer incentives to workers who take part in ride-sharing.
Resources for small businesses in Virginia
Here are a few organizations for small business owners in Virginia who are looking for resources to help them move forward:
U.S. Small Business Administration (SBA)
The SBA offers financing and grants as well as consultations and counseling services. Small business owners are encouraged to use the SBA's Office of Advocacy profile on Virginia for more information.
SCORE's volunteer business professionals and expert mentors give counsel and guidance to entrepreneurs who are looking to start or expand their businesses. The services are entirely free and volunteer-driven. There are nine regional SCORE chapters in Virginia, which can be found via the link below.
Virginia Small Business Development Center (SBDC)
Virginia's SBDC is a statewide network that supports entrepreneurs and business owners. Each center offers no-cost, confidential business consulting and targeted educational programs to help improve and grow small and emerging companies in the state. You can find your region's small business development center via the link below.
Virginia Department of Small Business and Supplier Diversity (SBSD)
The state's proprietary SBSD assists with the process of business certifications, provides business development advice and outreach services, and includes the Virginia Small Business Financing Authority.