Updated June 25, 2020:

Sole Proprietorship in California

Creating a sole proprietorship in California, compared to forming other types of corporate entities, is quite a simple process. It isn't even necessary to file any type of legal documents with the California Secretary of State in order to create your business entity. Compared to other business entity types, establishing your sole proprietorship is very quick and easy.

The five basic steps you must take to form a sole proprietorship in California are:

  1. Select a name for your business.
  2. File a Fictitious Business Name Statement with the recorder in your county.
  3. Obtain an Employer Identification Number (EIN) from the IRS
  4. Obtain any necessary zoning clearance, permits, and licenses
  5. Publish an announcement of your new business entity in a generally circulated publication such as a newspaper.

Searching through the excellent Cal Gold database that the California government provides will offer you lists of any permits that might be required in order for you to start a new business in the state. It is organized by business categories, and there are links to the agencies which may require your attention.

Sole proprietorships are not technically legal entities. You are simply doing business as a different name. In many counties, the equivalent of a fictitious name form is actually referred to as a DBA.

When you're starting a new business, you should begin by writing a business plan. Developing a formal business plan is crucial because it will help you to more easily identify the weaknesses and strengths of your business so that you can make any necessary adjustments. With your business plan, you can also find opportunities for growing your company and will be able to detect any potential obstacles or threats to your business.

Choose a Business Name

Sole proprietorships in California are allowed to use any name you choose, as long as:

  • It isn't exactly the same as, or even too similar to, a business that is already registered in the state.
  • The business name you choose isn't in any way misleading to the general public.

To find out whether the business name you've chosen is available, you should check the following three places:

  • U.S. Patent and Trademark Office — If you choose a name that someone has trademarked, you may not be allowed to use it.
  • California Secretary of State — You should search the Limited Liability Company category, as well as the corporations.
  • Recorder's Office — Check the one for the county where your business will be located.

There is a great deal of valuable information available online. However, you may also obtain a name check free of charge, by simply filling out a "Name Availability Inquiry Letter" that you can download from the official website of the California Secretary of State, then mailing it to them.

If the name you've chosen for your sole proprietorship in California includes your last name, you should check to see if you even need to have proof of your business name. You may also want to consider registering the name of your business as a trademark at the federal or state level. However, it is not required.

File a Fictitious Business Name Statement

The state of California requires that you file a Fictitious Business Name Statement in the recorder's office in the county where your business will be located and only if the name you've chosen for your sole proprietorship in California is not the same as your legal name.

You may find a list of county websites on www.counties.org, which is the California State Association of Counties. Although business owners don't have to file their Fictitious Business Name Statement by the time they start doing business because there is a grace period. But they must file the form no more than 40 days after their business start date.

In California, there is a $26 fee to file the Fictitious Business Name Statement. There could be serious consequences for failing to file it before the end of the grace period. For instance, you may not be able to enforce a business contract or maintain a legal action if you don't have a current Fictitious Business Name Statement on file.

The last step in the process of registering a fictitious business name for a sole proprietorship in California is for business owners to publish the Fictitious Business Name Statement within the county where the business will be located for four consecutive weeks in a well-known newspaper.

Obtain Licenses, Permits, and Zoning Clearance

Depending on your type of business, it may be necessary for a sole proprietorship in California to obtain one or more permits or licenses. For instance, anyone serving or selling alcohol must obtain a proper license from the California Department of Alcoholic Beverage Control. While a license issued by the California Bureau of Home Furnishings and Thermal Insulation would be required for anyone wishing to sell mattresses.

Fortunately, the state maintains an extensive database containing every permit or license which a sole proprietorship in California might require. It is accessible to any business owner simply by visiting the CalGold website, which is maintained by the California Governor's Office of Business and Economic Development.

All you need to do is enter your county and city. You will then be provided with a list of all the licenses and permits you will be required to have, based on your type of business activities. The website also offers information regarding any laws which might be relevant to your business, such as minimum wage, or filings you might be required to make, such as for inspections.

Unless you are operating a home-based business, it may be necessary for you to acquire an occupancy permit from the city and/or county where you will be conducting your business activities. Occupancy permits require a visit from a government inspector, who will ascertain that your business is in compliance with all ordinances and approve the premises.

The inspector will establish that your business activities are suitable for the zoning and planning laws of your location. Then you will be allowed to pay the government fee for your occupancy permit.

If your home will be the location of your sole proprietorship in California, then it may be necessary for you to apply for a home occupation permit. Then an inspector will visit your premises, and you will be able to pay the fee for your occupancy permit.

It's possible that home occupation permits may be subject to restrictions which don't apply to businesses that aren't located in residential neighborhoods. Municipalities will sometimes prohibit, among other things, too many deliveries, signs or parked cars.

Certain industries, professions, vocations, and occupations will require particular licenses from state agencies such as the California Department of Consumer Affairs. For instance, you will probably be required to apply for a retail seller's permit from the California State Board of Equalization if your business activities include selling retail products.

Obtain an Employer Identification Number

Sole proprietors in California who plan to hire employees will be required to have an Employer Identification Number (EIN) for the purposes of tax withholding. Any business with employees must report wages to the IRS, using their EIN.

The EIN consists of 9 digits and is obtained from the IRS. It is like a Social Security number for a business. You will be asked for it in many of the places where you would use your Social Security number for personal reasons. You will need it at the bank, for your licenses and other matters related to your business.

There is no charge to get an EIN, and you can register for it online, using the IRS website. Depending on the number of employees you have and the volume of your business, it's possible that you might be required to make tax payments to the IRS every quarter. You may even be subject to some type of special tax reporting.

If your sole proprietorship in California will be paying a minimum of $100 to employees in any quarter, then you will have to register for a California employer account number online at the California Employment Development Department (EDD) website. Anyone hiring employees in California is required to inform both the State of California and the IRS.

You will find a great deal of useful information on the Hiring Employees page of the IRS website. It gives you details about all the steps you must take, such as withholding allowances certificates and verifying eligibility of your employees to work in the United States. You are required to report all new employees to the new hire registry within 20 days of the first day they come to work for you. You must inform both the State of California and the IRS when you hire a new employee for your business.

Sole proprietors in California who do not have any employees do not need an EIN because they can simply continue to file taxes using their Social Security number. However, you may want to get an EIN even if you aren't required to. Not only can it help to prevent identity theft, but many banks require a business to have an EIN in order to open a checking account for your business.

Next Steps

You should set up a bank account for your sole proprietorship in California using your EIN and the fictitious business name that you've chosen in order to keep your business finances separate from your personal ones. You may still need your Social Security number, as well as your local business license and a copy of your business name filing. However, if your surname is part of your business name, you may not be required to show any supporting documents.

It may be necessary for you to pay or report items like use tax or sales tax, depending on the type of business you will be operating. These types of taxes are collected by the California State Board of Equalization.

Other types of reports or returns may be required, as well, either by the State of California or the IRS. Two valuable resources for more information about these are the website for the California Franchise Tax Board's Information Returns and the IRS Guide to Information Returns on the IRS website.

Since sole proprietors are liable personally for any debts or obligations of the business, you may want to consider getting workers' compensation insurance and business liability insurance. Both of those will provide at least some sort of financial protection again unexpected circumstances.

You can probably find coverage from a California licensed insurer. And the workers' compensation insurance is handled by The California Division of Workers' Compensation. Several factors will determine how much you will pay for your insurance coverage. For example, the type of work in which your business is engaged, your company's total wages, and the total number of people you employee can all impact the price of your policy.

While creating a sole proprietorship in California is relatively easy, you may want to seek advice from legal and accounting professionals before you finalize a commitment. You should also consider the fact that running your business as a sole proprietorship exposes you to personal liability. Creditors will be able to pursue your personal assets to cover the debts of your business. If you want to shield yourself from personal liability, then you may want to establish a limited liability company instead of a sole proprietorship.

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