You have a business idea, and you’re ready to get it launched. For many, that means establishing a sole proprietorship in California. The process is quite straightforward with no formal formation filing necessary at the state level.
Most often, there are local considerations and several steps to take that can minimize risks and improve your business success. Even without a formal, legal requirement for forming a California sole proprietorship, there are rules you have to follow, including local city and county regulations, fictitious business name filings, and tax registrations.
The following tips and steps will help you to register your business, as necessary, and establish a strong foundation.
What is a sole proprietorship in California?
One of the most important things you know about a CA sole proprietorship is that it is the simplest, most straightforward establishment of a business you can create. It is the default structure when one person starts a business and begins operating it. There’s no complex case involved in structuring it or costly legal proceedings to follow.
When you create a sole proprietorship, you’re creating recognition of your business, but it’s not a separate legal entity from you, personally. That means that:
- You own and run your business.
- You, as the owner, are liable for all aspects of your business, including debts and claims made against you.
- You will receive the earnings from the business and must report them to the IRS and the state as your personal income on your annual tax return.
That makes this different than other types of business entities, where the legal process will create a separate entity for your company from your personal liabilities.
You do not need to file formation documents with the California Secretary of State to create a sole proprietorship, as you would with other formal types of business structures. However, you do need to be compliant with all local regulations related to your business type and industry. You also have to remain legally registered as required at the tax level.
When starting a sole proprietorship in California, you just open your business’s doors. Just make sure you research and develop a plan for meeting all other requirements set by the city and taxing authorities related to your business. We’ll help you with some of those details here.
How to register a sole proprietorship in California
If you want to register a sole proprietorship in California, you’ll need to consider the following steps. Remember that, unlike other formal business structures, you do not have to file any specific requirements with the California Secretary of State. Here is what you should do to establish your business.
Step 1: Choose a business name
You can choose any name you like, but there are some rules to keep in mind. Many sole proprietorships operate under the owner’s business name. That, again, demonstrates how this type of filing does not create a separate entity for your company. If you plan to operate under your name, then you do not need to seek a “Doing Business As” or fictitious name.
If, alternatively, you wish to use a different name for your business from your own legal name, you need to file a Fictitious Business Name (FBN) statement. This is simply a legal document that alerts the government that the FBN you select is associated with you, legally. If you decide to take this step, you will need to file the FBN with the county in which you operate. It is NOT done through the California Secretary of State.
Step 2: File a Fictitious Business Name (if needed)
If you decide to use a separate name for your business, you can create an FBN with your county clerk. Most counties allow you to do this right on the county’s website. It may be the Registrar-Record or County Clerk website. There are differences between the counties in terms of the process.
You will need to pay a filing fee for taking this step. The FBN typically costs a minimal amount (this can change over time) that you can pay it online. The entire process can happen online, which requires you to show proof of identity, a signature, and make a payment. Once you do that, you will receive your FBN filing in your email.
Note, you can also complete the process in person by scheduling an appointment at the county clerk’s office (some require up to three weeks in advance to book your in-person appointment).
The state of California requires that you publish your FBN in a local newspaper for several weeks. This creates public awareness of your business. You will need to pay any associated costs with that process. You will need to submit proof of publication with the county clerk once it is filed.
Note that because of this publication process, the cost of obtaining an FBN in California is more expensive than it is in other states. However, it does not take long to do and allows you to operate your business under a different name. That can help you with branding and the establishment when you’re just starting a business in California.
Step 3: Obtain required business licenses
To establish a California sole proprietorship, or any business, you must meet licensing requirements. The challenging part of this process is that the requirements for licenses and the process for obtaining them differ by state. There is no single “California business license” available.
Instead, contact your local city department office to determine what the business requirements are. Some cities require you to provide detailed information about your business and what you do. Others have very limited requirements. The fees paid will vary by the city and the type of license you need.
Also important are state licensing requirements. Many people working as professionals in the state must have a state-approved license. This includes attorneys, medical providers, electricians, cosmetologists, and other industries. If you need to obtain a state license, they are handled through the affiliated state board. You will need to meet the individual education and liability requirements for each profession.
Step 4: Register for taxes
Even though you are starting a sole proprietorship in California, which does not require a formal separate establishment process, you will still need to pay taxes as any business in your field would. This differs based on what your business is and how it operates.
- Selling goods: If your business involves selling goods or services, you will need to register with the California Department of Tax and Fee Administration (CDTFA) to obtain a seller’s permit. There are typically no costs associated with obtaining a seller’s permit.
- Employees: If your business involves hiring employees, it is beneficial to obtain an Employer Identification Number (EIN). This number allows the IRS to recognize your business as an employer. This is not always necessary for a sole proprietorship.
Remember that you have to report your income to the IRS and the local taxing authorities as you would any other income you receive.
How much does it cost to set up a sole proprietorship in California?
Starting a sole proprietorship in California requires several steps. Costs will differ for setting up your business based on the industry and licensing requirements. Here are some of the most common costs you can expect.
Fictitious Business Name costs
These fees differ by the county but tend to be under $20 or around that value. The information is available on the county clerk’s website. The cost of an FBN can be more expensive than expected because of the legal requirement to file a newspaper ad. Costs can range from $50 up to $120, depending on the costs of the local paper itself.
Business license costs
This is also a varied cost, based on the type of business you do and the local city’s laws. If you are operating a business out of your home, you’ll follow those rules even if you travel to other cities to meet customers. However, some cities may require you to obtain a local license to service businesses in their jurisdiction.
Most of the time, business licensing costs vary depending on the gross receipts. You will be able to learn more about the specific requirements within the city’s Department of Commerce. You can also use the California Office of the Small Business Advocate assistance tool, which will help you find the licensing requirements for your city. It also breaks down any permits you need and the agencies you need to obtain those permits from within your city or county.
Other potential startup expenses
As you establish your CA sole proprietorship, don’t overlook the importance of planning for other costs. Some of the most common costs include:
- Insurance to operate your business, including protection for assets and liability insurance
- Equipment purchase costs and fees for establishing service for them, such as updating electrical systems or obtaining internet access
- Permits required by the city or county based on the type of business.
- Accounting software-related costs
Many service-based businesses can get underway for a few hundred dollars. However, if you are operating a larger, more regulated business, you will spend more to meet the requirements of those agencies.
Sole proprietorship vs LLC California
A California sole proprietorship is different than establishing a Limited Liability Company (LLC). Consider these differences.
Liability protection
In a sole proprietorship, there is no separation between your business and your personal assets and debts. If you make a mistake and someone sues you, your personal assets are exposed to that risk.
In an LLC, that is not the case. The LLC is a separate legal entity. As long as you maintain a clear separation of your business and personal assets, you do not have the same exposure.
Costs comparison
To register a sole proprietorship in California, you pay only those costs listed above. There’s no formal filing process. However, an LLC California will require formal filing with the California Secretary of State. You must pay all state formation fees in this situation. Also important, all California LLCs pay an annual franchise tax.
From a cost standpoint, then, a sole proprietorship is structurally cheaper to form.
Tax treatment
In most situations, an LLC and a sole proprietorship in California will maintain the same tax treatment, meaning that both are taxed the same. You report your income on your tax return in both cases, on a Schedule C. LLCs can also elect to file as an S Corp, which can reduce the risk of double taxation.
When to choose each
Consider the following when trying to choose which is best suited for your situation:
- Sole proprietorship: This is a low-risk business with lower costs out of pocket. It tends to be ideal for early-stage companies just getting started. You have some liability risk to your personal assets.
- LLC: A growing business benefits from an LLC, as does any company in which there is a higher risk of liability. If you plan to hire employees, an LLC can be wise.
Ongoing requirements for California sole proprietors
You’re ready to start your business, and opening your sole proprietorship in California is a straightforward process. Once opened, you may need to:
- Maintain any required business licenses, typically with an annual renewal.
- Meet all local permitting renewal guidelines.
- Pay quarterly estimated taxes to the IRS (and generally for state-related costs as well).
- Maintain compliance with seller’s permits if that is applicable to the type of work you are doing.
There’s no annual state filing requirement as there is with an LLC. Just make sure you stay up to date on all professional requirements.
Conclusion
Starting a sole proprietorship in California can be a rewarding experience. It is the simplest and least expensive way to get your company in place. The only real significant initial cost is the costs associated with FBN publication and local licensing, depending on whether you need these requirements.
This business type is best for freelancers and small service businesses without employees and with low risks. As your business grows, though, consider forming an LLC to add layers of success.