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How to start a sole proprietorship in California?

A sole proprietorship is a type of business that is also known as a sole trader or an individual entrepreneurship. It is an unincorporated entity that is basically owned by a single person or an individual. This is actually the simplest legal form of business that you can form in any state in the US. If you are planning to start a sole proprietorship in California then there are several advantages that you may enjoy including tax benefits. Since this type of business is indistinguishable from the owner, the sole proprietorship California taxes or taxation will be quite simple. This is an article focused on helping you understand what a sole proprietorship is in California and the various requirements of forming this business. These include registration of a DBA, choosing a business name, obtaining business licenses and permits, and taxes among others.

Sole Proprietorship in California

California is one of the most favored states among entrepreneurs as the state with the largest economy is the US and offers several benefits and opportunities to new and existing businesses. The state has a $3.1 trillion economy and constitutes 14% of the US economy making it one of the best places to start a sole proprietorship in California. The San Francisco Bay Area in California has high economic activity taking its rank to 19th in the world. Some of the top businesses based in the San Francisco Bay Area include Wells Fargo & Company, BNP Paribas, Gap Inc., and Old Navy. As a sole proprietorship business in California, you can leverage the various California state incentive programs. Some examples are the sole proprietorship California taxes credit programs called California Competes Tax Credit and the New Employment Credit (NEC).

What is a sole proprietorship in California?

California is a dream state for every entrepreneur planning to launch their idea or concept in the US or globally. You can choose from several different types of businesses although sole proprietorship is one of the most common types of startups. You can start a sole proprietorship in California if you are the only owner. A California sole proprietorship is not considered as a separate business entity like a professional corporation; instead it is considered to be an extension of you as an individual or a single owner. In a way, the owner and the business are the same entity and this is an important consideration when it comes to sole proprietorship California taxes. One of the biggest advantages of starting a sole proprietorship in California is that the overall cost of forming this form of entity is less as compared to corporations or limited liability companies.

What are some key features of sole proprietorship?

A sole proprietorship is the oldest form of business in the US and globally and if you are planning to start a sole proprietorship in California then there are some key features that will help you to understand this form of entity better. The key features are:

  • This type of business is a single owner business and hence the sole proprietor and his/her business are considered one and the same.
  • Since it is a single owner business, all management based decisions will be made by the entrepreneur or the sole owner without any interference from any other owner like in a multi-member LLC
  • When it comes to sole proprietorship California taxes; the taxes are filed through the individual income tax return
  • Filing a sole proprietorship in California means you as the owner will be personally liable for any and all actions as well as debts related to the business
  • Sole proprietorship businesses have low startup costs as it requires less capital initially and easier payroll requirements
  • The owner of this form of business will receive all the profits as well as be responsible for all business losses
  • If you are wondering how to start a sole proprietorship in California then the answer is that since there is an individual owner, you will not be required to file any type of formation document for organizing the business with this state, although there would be other requirements like filing a DBA or trade name registration and obtaining the necessary business license.
  • Apart from an individual, a married couple can also operate a sole proprietorship in California
  • A sole proprietorship business will remain active until it is dissolved by you or upon the death of the owner. It can also be passed down to an heir.

Are you ready to start a sole proprietorship in California?

Steps to Start Sole Proprietorship in California

One of the simplest forms of California business entity is a sole proprietorship. So, how does the filing of sole proprietorship in California process work? It is a fact that the process for starting a sole proprietorship business is quite simple as compared to other forms of businesses like an LLC or a C-Corp. One of the advantages this type of business has over other businesses is that you are not required to register your new business with the California Secretary of State. Simultaneously, there are several state based regulations and requirements that you need to consider, so that you are able to form a new business without any glitches. The following steps will provide guidance in terms of how to start a sole proprietorship in California correctly while remaining compliant with all state regulations.

1. Choose your business name

The first step towards filing a sole proprietorship in California is choosing a business name. Every business or a brand has to have a name as this name is what your prospective customers will remember. It often creates the first impression with prospective customers and investors. A business name can also help in communicating your business strategy and the type of product or service you are offering e.g., the name Sam’s Car Rentals translates into the fact that the business offers car rentals for tourists, conference attendees, and business people.

A sole proprietorship can exist under the legal name of the owner but sometimes an owner may want to use a different name for several reasons. These can be for marketing and advertising purposes. It is important to note that the name you choose should be distinguishable from the name of any other business although it can be a close variation. At the same time, you need to ensure the name is not misleading to the public. For example, if you add L.L.C or INC. to your name then that would be misrepresentation of a sole proprietorship firm.

One of the ways to check for the originality of the business name and ensure its availability in the state of California is by conducting a business name or entity search.

2. Register your fictitious business name (DBA)

There are two types of names a sole proprietorship can opt for. One is to register the owner’s name and the second is to file a Fictitious Business Name also known as a DBA or Doing Business As. If you are thinking of filing sole proprietorship in California with any name other than your name then you will have to file a DBA. For example, Dean Johnson owns a sole proprietorship and the name of the business is Dean Johnson Plumbing then he will not be required to file a DBA. On the contrary, if he names the business as “Clear Drain Plumbing” then he will have to file a fictitious business name. A California DBA has to be filed with the city or office of the county clerk in the city or county the business is located. The filing fee will depend completely on the city or county it is being filed in. We at IncParadise can help you in filing your Fictitious Business Name (DBA) in California.

3. Get EIN

A sole proprietorship business is considered as a disregarded entity or a pass-through entity where sole proprietorship California taxes are concerned. The question is do you need an Employer Identification Number or EIN? If you start a sole proprietorship in California without any employees and if you are not filing pension plans or excise tax returns then you will not be required to apply for and obtain an EIN. You can file your taxes using your Social Security number (SSN). As a sole proprietor, you will be required to apply for an EIN with the IRS if:

  • You are planning to hire employees
  • You inherit or buy an existing business, which is then operated as a sole proprietorship entity
  • You have a Keogh plan (tax-deferred pension plan) or a Solo 401(k) retirement plan
  • You form a partnership, LLC or incorporate

4. Obtain necessary licenses and permits

Whether you start a sole proprietorship in California or any other form of business; you may need to apply for and acquire federal, state, regional or local business licenses and permits. As a sole proprietor business you may have to apply for and obtain multiple licenses and permits depending on your business activity. There are primarily two types of licenses – general and regulatory. There are certain licenses and permits that are issued only by the city office or county clerk of the place where the business is located or conducting business. The IncParadise “Business License Research Report” service is a resource that will help you in determining what licenses or permits your business may require. It also contains a list of filing instructions, supporting document requirements, and fees for all business licenses and permits for your Sole proprietorship business in California.

5. Open a bank account for your business

When you start a sole proprietorship in California, one of the important tasks is to open a business bank account. This will help you to keep your profit and losses or deposits and expenses separate from your personal banking account. When you maintain a separate bank account for business, it will also ensure you are able to file sole proprietorship California taxes properly. Secondly, having a business bank account can add to your professionalism and credibility as a business. One of the advantages of having a separate bank account for the business is that you will be able to accept credit card transactions wherever necessary as well as a point of sale system. You will be able to open a bank account using your fictitious business name (DBA) and the EIN, although rules and regulations vary from one state to another.

6. Report and pay taxes

One of the important aspects to consider when filing a sole proprietorship in California is the business tax. It is true that as a sole proprietor, the entire process of taxation is simple as you and your business are considered a single entity by the Internal Revenue Service (IRS). As a result, you will have to file sole proprietorship California taxes as the owner, on the income that you have earned from your business. You will be reporting income earned and losses incurred on the personal tax return form (IRS Form 1040).

Ready to Start a Sole Proprietorship Business in California?

A sole proprietorship is also known as a sole trader business or an individual entrepreneurship and is considered one of the simplest legal forms of business. It is an unincorporated entity and you can start a sole proprietorship in California without the need to register with the Secretary of State. The establishment of this type of business is quite easy and inexpensive and has few regulatory requirements. If you are wondering how to start a sole proprietorship in California then IncParadise can help you in starting your California sole proprietorship business.

We also offer several additional services that you may require if you are planning to start a sole proprietorship in California like getting an EIN, filing a DBA, and Registration of a foreign company among others.

Do you want to start your Sole Proprietorship in California?