Conditions of small and medium business development (SMB) and its increasing role in national economics are reviewed in this article. The authors proved the hypothesis that the formation of a favorable business environment can have a greater impact on increasing entrepreneurial activity than the amount of state support. Functioning of favorable business environment can be provided by: improvement of cooperation mechanisms of state and municipal government agencies and business entities in terms of maintaining mutual interests; setting the stage for business activity and increasing competitive positions of SMB entities; building the motivation of SMB entities towards self-organized and self-regulatory development. The authors made up conclusions and proposed to change the organizational methods of state and municipal support for SMB in the terms of creating the favorable environment for business subjects in various areas considering their functional needs. They also identified the parameters of effectiveness of targeted measures of state support.