Despite leading the region in businesses applying to open, Illinois’ combative business climate results in few business actually starting.
Illinois is one of the most challenging states in the Midwest for would-be businesses to open.
Only 5.6% of business applications in Illinois become operating businesses within the first year. That’s the third-lowest rate in the Midwest and below the national average of 6.1%, analysis of business formation statistics from the U.S. Census Bureau shows.
Only Michigan and Ohio – both at 4.8% – saw lower 2024 business formation rates among Midwestern states. North Dakota will see 1-in-10 business applications yield a business, nearly double the rate for Illinois and second highest in the U.S. South Dakota and Nebraska each have business formation rates over 9%, ranking fourth and sixth in the nation.
Illinois’ failure to foster an environment in which entrepreneurs can fully execute on their business aspirations stands in stark contrast to the amount of business potential within the state. Illinois leads the Midwest in total business applications and ranks sixth among all states with 171,141 business applications filed in 2024. Much of this has to do with Illinois’ large population base, but Illinois ranks 24th in business applications per capita. That means Illinois still has a lot of business application activity.
When looking at business applications determined to be most likely to create jobs, and after adjusting for population size, Illinois leads the region in high-propensity business applications.
For every 1,000 residents, 4.9 high-propensity business applications are filed in Illinois. High propensity business applications are those filed by corporations or those with planned wages. In other words, they’re the applications that are likely to result in future businesses with employees.
Using that measure, Illinois’ business activity is right on par with the national average of five high-propensity business applications per 1,000 residents, and far ahead of all other Midwestern states. Indiana is the next closest Midwestern state with four higher propensity business applications per 1,000 residents. All other states in the region see fewer than four per 1,000 residents.
This high level of business activity reflects Illinois’ potential and is often touted by Gov. J.B. Pritzker as proof the business climate is thriving. Unfortunately, a high level of business applications doesn’t mean much for Illinoisans unless they result in businesses that hire people.
Despite being among the states with the most applications per capita, very few of these business applications result in businesses opening. It is no coincidence that, generally, the states with the highest business formation rates also have the lowest unemployment rates in the region.
In states that foster an environment in which businesses can actually open their doors, residents find more job opportunities and see lower unemployment rates. Illinois offers one of the least competitive business tax environments in the Midwest, only beating Minnesota.
Illinois has some of the most accessible resources for entrepreneurs in terms of financing and human capital, and as such experiences a high level of potential business activity. But Illinois has one of the worst track records in the region for its ability to turn applications into real businesses that offer jobs.
State leaders need to turn the situation around, starting with simplifying Illinois’ regulatory code, which is the third-most cumbersome in the nation. Another major barrier would-be businesses face is the high tax burden inflicted in Illinois because of the state’s pension crisis. For that reason, investment expert Warren Buffet previously recommended companies avoid moving into states with large pension debt.
Only structural pension reforms enabled by amending the Illinois Constitution can truly solve the state pension crisis. A “hold harmless” pension reform plan such as one originally developed by the Illinois Policy Institute – based loosely on bipartisan 2013 reforms – could help to eliminate the state’s unfunded pension liability and achieve retirement security for pensioners.
