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How to start a sole proprietorship in California
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California Sole Proprietorships: Everything You Need To Know
A sole proprietorship is the simplest form of business ownership. It refers to a single-owner business that is not registered as a corporation or a limited liability company (LLC) with the state. You might already be a sole proprietor without even realizing it, especially if you work as a freelancer, on a commission basis, or as an independent contractor. If this applies to you, it’s important to learn about the process of registering a business and promptly seek advice from our experienced Los Angeles sole proprietorship lawyer at EJP Law, P.C..
As a sole proprietor, you have certain legal obligations to fulfill in order to operate your business within the confines of the law. Additionally, as a sole proprietor, you personally assume responsibility for paying all income taxes and business debts. Luckily, our California business attorney can guide you through this process. To learn more, contact our office now for a consultation.
How To Form A Sole Proprietorship In California
Establishing a California sole proprietorship doesn’t require filing any legal documents with the state government. While there’s no mandatory action to create a sole proprietorship, you can follow four straightforward steps to kickstart your business:
01
Choose A Business Name
02
File A Fictitious Business Name Statement With Your County
03
Apply For Licenses, Permits, And Zoning Clearance
04
Obtain An Employer Identification Number (EIN)
1. Choose A Business Name
In California, a sole proprietor has the option to use either their legal name or a trade name, also referred to as a “fictitious business name” (FBN) or “doing business as” (DBA), for conducting their business. However, if you decide to use an FBN or trade name, it must be unique and not already registered by another company in the state.
It’s important to select a business name that is distinct from other registered businesses to avoid potential trademark infringement. According to trademark law, your trade name should not be used by another entity in a way that could confuse consumers. If you choose a name that is identical or too similar to someone else’s trademark, and you both offer similar goods or services, you may be infringing on their trademark rights. If you discover a competitor with a similar name, it is advisable to choose an alternative name. To ensure the availability of your business name, it is advisable to conduct a search in the relevant government databases listed below:
- California Secretary of State
- United States Patent and Trademark Office’s Trademark Electronic Search System
- The county recorder’s office where you plan to do business
2. File An FBN Statement With Your County
If you operate your business under a name that differs from your legal name, California law requires you to register your Fictitious Business Name (FBN) with the county recorder’s office where your business is located.
You can find many downloadable FBN Statements on the county website. Business owners have a window of 40 days from the start date of their business to file an FBN Statement (Cal. Bus. & Prof. Code § 17910 (2023)).
Starting in 2023, the filing fee for registering an FBN is generally $40, although it may vary depending on the county. In addition to the fee, business owners must complete the application process by publishing the FBN Statement in a well-known newspaper within the county for four consecutive weeks (Cal. Bus. & Prof. Code § 17917 (2023)).
3. Apply For Licenses, Permits, and Zoning Clearance
Depending on the nature of your business, you may be required to apply for business or professional licenses. In California, you can access a comprehensive database of all the licenses and permits that may be necessary for your business activities.
The California Governor’s Office of Business and Economic Development (CalGold) website allows you to search for the specific licenses and permits required for your business. Additionally, by entering your county or city name and business type, you can obtain information about relevant licenses and permits.
4. Obtain An EIN
Sole proprietors who plan to hire employees must obtain an Employer Identification Number (EIN). This unique nine-digit number, issued by the IRS, is used for tax reporting purposes. It is mandatory for businesses with employees to report wages to the IRS using their EIN. You can conveniently register for an EIN online through the IRS website.
However, sole proprietors without employees are not obligated to have an EIN. Instead, they can use their Social Security number for tax reporting. Nonetheless, it may still be beneficial to obtain an EIN. Some banks require an EIN to open a business account, and having an EIN can help reduce the risk of identity theft.
In California, businesses that pay at least $100 in wages during a quarter must also register for a California employer account number. You can easily complete the registration process online via the California Employment Development Department (EDD) website.
California Sole Proprietorship vs California LLC
Many individuals lack awareness of the fundamental distinctions between a sole proprietorship and an LLC. A sole proprietorship is the simplest way to initiate a business, owned and operated by a single individual who assumes full control over all aspects, including investments and profits. However, it comes with the drawback of personal liability for any company debts, leaving one’s assets vulnerable to creditors in case of non-payment.
On the other hand, an LLC, or limited liability company, presents an alternate approach to business establishment. By offering a shield for personal assets, an LLC provides liability protection while maintaining operational flexibility.
The most notable contrast between sole proprietorships and LLCs lies in their ownership structure. Sole proprietors retain complete autonomy over their businesses, whereas LLCs require members to execute operating agreements that establish ownership rules and management decisions. Moreover, an LLC allows for separate quantification of each member’s financial stake, as opposed to a sole proprietorship that has only one “owner.”
When considering the type of entity that aligns with your business objectives, it is crucial to examine the taxation structure. Sole proprietors report their income on personal tax returns, whereas LLC members have a wider range of taxation options available. These options include pass-through (default), C corporation, or S corporation status, which means that opting for an LLC could entail additional tax liabilities compared to a sole proprietorship, depending on the chosen option.
Frequently Asked Questions
How Do I Convert From A Sole Proprietorship To An LLC?
Starting your California Sole Proprietorship may seem convenient, but converting it to an LLC or Corporation later can be a cumbersome process. It involves multiple steps and filings with various state departments and local governments.
To convert from a Sole Proprietorship to an LLC, you’ll need to update the state, IRS, and your bank about the change in your business type. Additionally, if your business requires a license or permit, you’ll have to re-apply for them under the new business entity. Don’t forget to update your contracts, website, marketing materials, and notify your clients and vendors.
Considering the complexities involved, if you have the resources, we recommend starting your California business as an LLC right from the beginning. It’s a more streamlined and hassle-free approach.
How Do I Look Up A Sole Proprietorship In California?
This unique number helps in identifying and distinguishing different sole proprietorships registered in the state. While sole proprietors are not always required to obtain an EIN, they often have the option to use their private social security numbers instead for business identification purposes. This flexibility allows them to easily manage their business affairs while ensuring compliance with the relevant regulations and requirements.
Can A DBA Operate As A Sole Proprietorship?
A DBA, or “Doing Business As,” is not the same as a Sole Proprietorship. It is essentially a pseudonym used to represent either a business or an individual. However, a Sole Proprietorship has the option to operate under a DBA name.
For instance, by default, a Sole Proprietorship is identified by the owner’s first and last name, such as “John Smith.” But if you run a bike shop, you can register a DBA called “John’s Bike Shop” to enhance your brand and marketing efforts while retaining the same business structure.
What Are The Advantages Of A California Sole Proprietorship?
- Simple to form – There is no requirement to create or file any business documents, although obtaining a business license is necessary for operations.
- Inexpensive – There are no expenses associated with creating or filing any business documents, except for acquiring a business license.
- You solely own the business – As the exclusive proprietor, you possess the privilege of receiving the entire proceeds and exercising complete authority over the operations of your business.
- Flexibility to conduct business in other states – Typically, you can engage in business activities in different states without the need for individual registration in each state. This eliminates the burden of filing separate registrations for conducting business in multiple states, while still maintaining compliance.
- No double taxation (flow-through taxation) – As a sole proprietorship, your business is not subject to separate taxation. Instead, the profits your business generates are reported on your personal income tax form, and you, as the owner, are responsible for paying taxes on those profits. This differs from a corporation, where the entity itself is required to pay a business tax, and shareholders are also obligated to report and pay taxes on their personal income tax forms.
What Are The Disadvantages Of A California Sole Proprietorship?
- No limited liability – Sole proprietors are not protected by limited liability, meaning that you are personally responsible for all of your business debts and actions. If your business lacks sufficient funds or assets to settle its debts or legal obligations, your personal assets, including your car, house, electronics, and other valuable possessions, may be used to satisfy the business debts.
- Limited initial financial resources to operate the business – The funds allocated for your business are its sole operating capital. If you decide to pursue business loans, your personal creditworthiness will be assessed to determine your eligibility. It is crucial to understand that the financial resources you have set aside are the lifeline of your business.
- Difficult to sell the business later as there can only be one owner of the business – There are no possibilities for partnerships, and it is not possible to issue shares to investors, similar to a corporation.
- The business stops when you do – When you neglect to dedicate time and effort to operating your business, its operations come to a halt. Additionally, in the event of your demise, your business will cease to exist.
Contact Our California Business Formation Lawyer Now
Starting a sole proprietorship in California may not always require the submission of paperwork. However, depending on your unique circumstances, you may need to file forms at both the state and local levels and adhere to various rules and regulations. As a business owner, it is crucial to comprehend the necessary steps for legally commencing and operating your sole proprietorship.
If you possess business experience and only need to fulfill a few requirements to establish your sole proprietorship, you can likely handle the tasks independently. However, should you encounter any complexities or require specific guidance during the initiation of your business, consulting with our Los Angeles business formation attorney is advisable. At EJP Law, P.C., we can assist you with business name registration, tax filing, and acquiring the necessary licenses and permits to set your business up for success.