How to Start a Sole Proprietorship in California

What is a sole proprietorship?

Each business in the US, from the smallest startup to the largest conglomerate, must be formed and operated according to a specific business structure. These various entity types dictate everything from what and how your business is named to how tax payments are made, and each has its own benefits and challenges. You may be most familiar with something like incorporation or corporation, but these are not the most common businesses. 

Sole proprietorship defined

A sole proprietorship is an unincorporated business that is owned and operated by a single individual. You don’t need to file any paperwork to form a sole proprietorship or pay any filing fees.

What qualifies your business as a sole proprietorship?

To be a sole proprietor, you need to sell products or services by yourself. You can’t work with anyone else.

Who is it best for?

A sole proprietorship is best suited for individuals who are looking to start a small-scale business or operate as a solo entrepreneur. It is an ideal choice for those who value simplicity, autonomy, and minimal legal formalities. Sole proprietorships are often preferred by individuals who desire complete control over their business decisions without having to consult partners or shareholders. Additionally, individuals with limited startup funds find sole proprietorships appealing due to their lower setup costs compared to other business structures.

It’s important to note that sole proprietorships are best suited for businesses with lower risks or liabilities, as the owner assumes unlimited personal liability. This means that personal assets may be at risk in the event of business debts or legal issues. Sole proprietors typically rely on personal funds or loans for financing and do not involve external investors.

Considering these factors, individuals who prioritize independence, simplicity, and have a relatively low-risk business venture can benefit from establishing a sole proprietorship. Assessing your specific business goals, risk tolerance, and consulting with professionals can help determine if a sole proprietorship is the right fit for you.

How to set up a sole proprietorship in California

The process to form a California sole proprietorship is as simple as saying you are a business – there is no formal registration or paperwork required. In fact, if you engaging in any business activity under your legal name, you are probably already running a sole proprietorship without knowing it! But that doesn’t mean there is nothing you have to do to keep up with federal and California business requirements. Depending on your type of business and your plans for it, you may want to consider these items. 

Naming your sole proprietorship 

Sole proprietorships are automatically considered to operate under the same name as their owner. For some types of businesses, this may work well, but others will want to choose a more “catchy” name or one that does not use their personal information. California allows sole proprietorships to operate under a fictitious business name (sometimes called a trade name, a DBA name, or doing business as) if they choose. 

To use a fictitious name, you will first have to be sure the name is available. You can look at the California Secretary of State’s website to see if a name is already in use. It is also a good idea to check with the trademark office to ensure you are not infringing on an existing protection. 

Once you know the name you will use, the next step is to file an FBN statement with the county clerk where your business is located.  There is a filing fee in most counties – this is often $40 but can vary by location. You will also have to publish the Fictitious Business Name Statement in a well-known newspaper in that county for four consecutive weeks to complete the application process. 

How to Check if a Business Name is Taken

Taxation 

Because a sole proprietorship is the same legal entity as its owner, taxes are very simple. When an owner is filing their personal income tax returns, they should include business income and expenses on their Schedule C or Form 1040. These will be taxed and deducted like all other personal income and paid to the IRS and California Franchise Tax Board.

The owner of a sole proprietorship is considered to be self-employed, which means they will be subject to self-employment taxes. These cover things like Medicare and Social Security that would typically be included in an employer withholding. 

If you are planning on hiring employees, you will also need to file for an EIN. This is an employer identification number issued by the IRS so that the business can withhold federal taxes from employees. For a sole proprietorship with no employees, the owner’s personal Social Security Number will suffice on IRS forms. 

Licenses, permits, and zoning clearance

While there is no state-level business license required in California, most businesses will need to obtain a seller’s permit. This gives the business the right to collect sales tax and pay it back to the state. There is no charge for this permit, which can be obtained online quickly. 

Your business may need to have other licenses and permits in place depending upon various factors. For example, many professions require specific licensing from the state, like nurses or barbers. Each municipality can also set its own requirements around things like business licenses and building permits; always check with your local government to be sure you don’t miss a requirement. 

California taxes

A sole proprietor pays income taxes on their business profits. Income is subject to federal taxes, and state taxes, provided your state levies state income taxes. As a business owner, you will file a Schedule C to pay taxes on your business income.

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