Is Alabama an expensive state to start a business? Experts say it's complicated

A new research study indicated that Alabama is among the most expensive states to start a business, but experts in the Birmingham business community say there are factors the study does not take into account.

Simplify, a publication that shares how-to guides for small businesses, analyzed the the most recent data from the Bureau of Labor Statistics, the Small Business Administration and Census Bureau, including basic business costs, labor costs, worker availability, cost of space and utilities and the health of the business environment in each state across the nation.

Based on these metrics, it ranked Alabama as the fourth most expensive state to start a new business.

In Alabama, business owners pay workers nearly $51,815 on average annually, pay an average 6.5% corporate tax rate and on average spend about $573 for a monthly commercial electric bill, according to the study.

Here's the breakdown that netted Alabama its ranking:

Patrick J. Murphy, director of the University of Alabama at Birmingham J. Frank Barefield Jr. Entrepreneurship Program and Goodrich Entrepreneurship Chair, said states have many different unique fees and taxes that don't show up in national-level studies, however. And there is even more variety in fees and taxes across counties and cities, which are under the national radar, he added.

"Also, I don't believe small business loan activity — 'total lending amount per 100,000 residents' — is a reliable indicator of the health of an entrepreneurial environment," Murphy said. "I believe one of the most reliable indicators is firm formation rate, which they did index in their study. If you look at the scores for that dimension alone, then Alabama fares well nationally. "

The net rate of business births in 2021 for the state was 1.15.

Murphy said from experience that it is easier and less expensive to launch and grow a business in Alabama than in Illinois, especially in Birmingham versus Chicago. He does believe, however that Alabama should focus on improving the availability of commercial real estate, which was another variable in the study.

Kellie Clark, CEO of AppThink, which is now running Voltage, Innovation Depot's six-week idea-stage accelerator, noted that there’s one question all business owners should ask when a state is cheaper for starting a business: Why?

"We know business startup isn't just about initial costs; it’s also about quality workforce, solid infrastructure, business-friendly policies and quality of life," Clark said. "An inexpensive business environment may signal regressive tax structures or disinvestment in other critical services which can create long-term impediments for a businesses. On the other hand, Alabama's consistent pursuit to be attractive to businesses is evident in the number of workforce programs, tax incentives and grants that can contribute to reduced business costs long term."

Startup cost is crucial, she added, but entrepreneurs must also think about how the state's economy, key industries and policies will holistically support their business's growth and staying power.

Blake Patterson, founder of Birmingham-based Simpeo and INMO, a fully monetized digital platform, said the article does not take Alabama's low cost of living into consideration, which enables him to put money back into his businesses.

"Additionally, with the way we've evolved in the last few years — in no small part thanks to the pandemic — I don't think many business owners even need to consider some of this data like available workforce, for example. While some businesses may require in-person labor, with INMO, I've been able to recruit and build a team that's based worldwide because we primarily work virtually.

"Being able to operate my business this way allows me simultaneously to take advantage of the benefits Birmingham, Alabama, offers: We have an incredibly supportive startup ecosystem, the aforementioned low cost of living and an international airport that allows me to travel as needed."