Sole Proprietorship California

California is an exciting place to begin a business and creating a sole proprietorship is one of the least complicated entities to form. Use this checklist to start your California sole proprietorship. This is a guide that will help you with the steps in forming a sole proprietorship. Learn how to set up and register a sole proprietorship, what forms need to be filed, and the permits or business license involved. Follow this simple process to get started or visit the additional sole proprietorship California resources provided for your convenience.

What is Sole Proprietorship in California ?

The most common form of business ownership is a sole proprietorship.  It is not considered a separate entity like a corporation but an extension of a single owner or individual. The company and the owner don’t exist apart from each other. A sole proprietorship consists of an individual or a married couple. A business is liable for all debt, obligations that are attached to the business including the profits earned.  Moreover, all business-related acts involving employees, delegating decisions, and management are attached to the sole proprietor. The life of sole proprietorship continues to exist until it goes out of business or once the owner passes away.

How to Start A Sole Proprietorship in California

Step One 

Decide on a business name.

Start your sole proprietorship by selecting a business name. Remember to check these three places to make sure your name hasn’t been trademarked by someone else:  U.S Patent and Trademark office, California Secretary of State, and Recorder’s Office (your county of business). For concerns regarding the legalities for selecting a name, speak with an attorney. You must file the name in the recorder’s office in the county where the business is located. A fictitious name statement allows your business to do business transactions in the state your business is in.  Make sure to file your name forty days after you open your business. California charges a filing fee, but forms and fees can vary from county to county. 

Are sole proprietors required to register with the state?

California law requires that a sole proprietor files their fictitious name or FBN with the Secretary of State. Owners of sole proprietorships often go under a different name other than their own to establish the business. This law was made to protect consumers from business owners who try to avoid liability by operating under a different name.  

 Step two

Establish and publish a DBA (Fictitious Business Name) statement.

“Doing Business As” is also known as your fictitious name and is not required. Sole proprietors tend to file a DBA for practical reasons such as sales and marketing. The county clerk’s office requires a signed affidavit of your published statement within thirty days after the final publication. In the majority of California counties, the published DBA statement must be in a local paper once a week for four weeks. Just make sure that the publication you decide to go with will provide an affidavit with the county clerk’s office, after requirements are met. A DBA must be filed anytime you don’t choose to use your last name or a different last name. It is important to keep in mind having a registered name with California doesn’t protect or give you exclusive rights to use that name. Only when you register a trademark under that name it allows for an exclusive right to use that name. 

Step three 

 Get a federal employer identification number (EIN).  

A federal employer identification number and must be obtained by the sole proprietors hiring employees. The IRS form SS-4 can be completed online or by mailing it to the IRS. If you are hiring employees, you must notify the IRS of all employees and the State of California.

Step Four 

Determine if you need a permit or license for the type of business you have.

Do you need to obtain any state and federal business permits or licenses? Most likely, yes. The best way to find out what licenses are relevant to your sole proprietorship is to go onto the CalGold database. This site is designed simply and guides you based on locations and business. In the state of California, whether the business is big or small, the business must apply for a general city business license. Regulatory and professional licenses for a barber, real estate agent, restaurant, and every type of business, will find regional, local, state, and federal information in the database. 

Step Five

Create a separate bank account for your business.

It’s best practice to create a bank account specifically for your sole proprietorship. When you go to the bank, you’ll need your EIN, social security number, a copy of the business name filing and if it’s applicable, your business license.

Step Six 

Evaluate the insurance needs of your business.

Determine how much business insurance your business needs. Sole proprietors are responsible if employees get hurt on the job. They are responsible for all aspects of a business. Entrepreneurs should carry workers’ compensation insurance including business liability, giving your business financial protection in case someone is injured on its premises. If you’re not sure, consult a professional in the insurance business or a business attorney, like Stone and Sallus, to determine those needs.

Sole proprietors are responsible for all debt. They are personally liable for all obligations of business including liability for employees’ actions on the job. It can be stressful to be a sole proprietor but if done properly it can be equally rewarding.

Tax Forms Needed for Sole Proprietorship in California

The United States Small Business Administration has many free informative tools to assist the sole proprietor, including  federal tax requirements for a sole proprietor.

Sole proprietors can locate essential forms for tax purposes on the site of the U.S. Small Business Administration. A sole proprietor will report Profit or Losses on forms: 1) Schedule C (include your California individual income tax return) and Form 1040 plus self-employment and estimated taxes (guide on how to make estimated tax payments). The tax rate of the return depends on your individual income tax.

Sole proprietors aren’t taxed separately from their business. Tax rates are the lowest of the business models and it’s easy to fulfill the tax reporting requirements as a sole proprietorship.

Sole proprietors are responsible for all debt. Sole proprietors are personally liable for all obligations of business including liable for employee’s actions on the job. Remember, creditors can go after your personal assets to recover any unpaid debts made by your business.  Success and failure are the sole owner’s responsibility.

Business Plans

All types of business plans include broad operational and financial objectives. Moreover, a  business plan might include a marketing strategy, target demographics and a value proposition. Entrepreneurs with a business plan usually have an easier start up period, eliminating most of the start-up mistakes.

There are two types of business plans:  

  1. Traditional business plan – A business plan is an extended roadmap of your business with details of the nature of the business, marketing & sales strategies, projections, and more. Typically, investors will require a business plan. 
  2. Business Model Canvas – A business model canvas is usually taken advantage of by the lean startup looking to validate a business idea, pivot based on the tested value proposition (along with 8 other components), to quickly get to market. 

Why is it important to Create a Business Plan?

It defines a new business, supports a loan application (lenders and investors), raises equity funding, pin-points business strategy, tracks responsibility performance and manages money goals for sales, costs, expenses and cash. 

Researching your industry, future customers, and competitors (and what sets you apart), can only help when running your business. A business plan is a plan of action, giving investors confidence that everything has been thought through. A business plan should be a crystal clear plan, mapping future profitability and sustainability.

Resources That Help Sole Proprietors

These resources provide additional guides for how to set up a sole proprietor in California, among other entities. These offices can administer, issue permits and licenses, and registrations for your business needs. The agencies below can help inform your sole proprietorship on outstanding requirements by different levels of government, county, state or federal.–  Governor’s Office of Business and Economic Development (GO-BIZ).– California Business Portal.

It’s always a good idea to contact your local chamber of commerce and ask them questions you might have concerning your business. 

At Stone & Sallus, our attorneys are also available to help answer questions on your sole proprietorship. Visit our other business resources and contact us for all your legal questions.

California Sole Proprietorships FAQs

Can Sole Proprietors hire employees?

Yes, a sole proprietor can hire employees. There is no limit in how many a sole owner can hire. Sole proprietors are responsible for filing taxes and proper administration documents for each employee. 

How do I look up a sole proprietorship in California?

If you are looking for a specific sole proprietorship in California, you can sometimes search by the entity number (EIN), the identification number provided by the California Secretary of State. Sole proprietors don’t always need to obtain an EIN and often use their private social security numbers instead. 

Does a sole proprietor receive a salary?

The sole proprietor isn’t eligible to receive a salary.  They are paid directly from profits and don’t receive a W-2 form. Remember you still have to pay taxes on what you pay yourself (self-employment tax) and set aside money to cover the expense.

Does a sole proprietor need a license?

Most sole proprietors operate under the name of the owners business, if a license is required the county and city will demand it before your business is allowed to operate.

Does a sole proprietor need a DBA?

Sole Proprietors are required by law to use their name as the legal name of their business. However, sole proprietors can operate the business activity under another name, a fictitious business name. ‘Doing Business As’, is optional, it is a fictitious name, used when you don’t use your own name to conduct business. The state requires that you register this name with them. Sole proprietors who have multiple businesses usually conduct business with a fictitious name.