How to Start a Sole Proprietorship in California
Starting a sole proprietorship in California can be an exciting and rewarding venture for aspiring entrepreneurs. To make the process simpler, this is a step-by-step guide on how to start a sole proprietorship in California, outlining the essential requirements, legal obligations, and practical tips to help you lay a strong foundation for your business success.
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.
Examples of a sole proprietorship
Freelancers working on Upwork, independent graphic designers, or people who sell their wares at a farmer’s market are all sole proprietors. If you are doing any kind of work as a single owner of a business, you are probably already considered a sole proprietorship.
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.
Sole proprietorship vs. LLC
An LLC is registered with the state, requires yearly paperwork, and offers liability protection to its owners. A sole proprietorship is not registered with the state and offers no liability protection.
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.
Is there any formal paperwork filed to establish this type of business?
No. You do not need to file any paperwork with the state to establish this type of business. However, if you want to name your business something other than your legal name, you can file a DBA, or ‘doing business as’ with the state.
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.
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.
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.
- Easy and inexpensive to set up: Starting a sole proprietorship requires minimal legal formalities and typically involves low costs, making it an accessible option for entrepreneurs on a tight budget.
- Complete control and decision-making authority: As the business’s single owner, you have complete control over all aspects of the business, allowing for quick decision-making and implementation of your vision.
- Simplified tax reporting: Tax filing is straightforward since the business income and expenses are reported on your personal tax return, eliminating the need for separate business tax filings.
- Unlimited personal liability: The largest drawback of a sole proprietorship is that the owner assumes all personal liability for debts, obligations, and lawsuits in the name of the business. If there is money owed, the business assets are not the only ones at stake – personal assets are too.
- Limited Resources: It can be more difficult for a sole proprietorship to find access to financing through lenders or investors, and some may have trouble opening a business bank account. This can limit growth potential and expansion opportunities.
- Sole responsibility: When the business is owned by a single person, that person can be make or break. A sole proprietor may have a large workload on their shoulders, which could cause burnout or even issues when they are not experts in the industry.
Do I need to file Articles of Organization for a sole proprietorship in California?
No, there is no required paperwork to form a sole prop. Articles of Organization are used to start an LLC in the state.
Do sole proprietors pay taxes in California?
Sole proprietors are subject to income taxes, just as any resident is. Small business owners pay taxes on their profits and file a Schedule C with the IRS.
What qualifies you as a sole proprietor?
To be a sole proprietor in California, you simply need to sell a product or service. You don’t need to file any official paperwork with the state.
Can a sole proprietorship register a business name?
Yes. Business owners can either operate under their legal name or can file a DBA, or ‘doing business as’ to establish a business name. A DBA is not a business entity, but the name is registered with the state.
What qualifies you as a sole proprietor?
If you sell goods or services to make money, you’re a sole proprietor. Proof of this type of business entity is on your income tax returns, where you pay taxes on your income.
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