How to Start a Sole Proprietorship in California (2024)
You want to be your own boss, and so you’re considering starting your own business. As a solopreneur, you control your work, time, and direction. But while business dreams dance in your head, there are a few practical must-dos before the freedom starts.
If you’re considering starting a business in California, forming a sole proprietorship is often the easiest option. As a sole proprietor, you’ll be personally responsible for all debts and legal actions taken against the business.
While the freedom and flexibility are appealing, the unlimited personal liability can be risky without proper precautions. That’s why partnering with an experienced business lawyer is so valuable.
Our California business formation lawyers can help you create a sole proprietorship, obtain a business license and permits, and implement strategies to limit personal liability.
With the proper legal guidance, you can enjoy the ease of a sole proprietorship while positioning your new business for success.
What is a Sole Proprietorship?
A sole proprietorship is a business that is fully owned and run by one person, with no legal separation between the business and the owner. We often explain it like this – if you operate a sole proprietorship, you keep all profits earned and owe all debts incurred. It’s your show.
This simplicity is the biggest appeal for many founders. You can get up and running instantly without the paperwork and fees required for incorporation.
However, it also comes with key downsides:
- You have unlimited personal liability. Your personal assets are vulnerable if the business is sued or can’t cover expenses. This is why protective measures like insurance are so important.
- Raising investment capital can be more difficult since you can’t sell shares in the business. The funding burden falls squarely on your shoulders.
- Continuity can be jeopardized if you pass away or need to transfer ownership for other reasons. The business is tied entirely to you as an individual.
In short – sole proprietorships offer agility and simplicity but lack defenses larger entities provide. We generally view them as a stepping stone to eventually forming an LLC or corporation down the road.
Requirements for Starting a Sole Proprietorship in California
Getting your sole proprietorship off the ground involves three key steps – naming your business, acquiring licenses, and registering for taxes. Let’s dig into each.
Naming Your Sole Proprietorship
You can either operate under your own personal name (John Smith’s Landscaping) or establish a fictitious business name (DBA), like “Green Thumb Landscaping.”
If you choose a fictitious name, you’ll need to officially register it:
- Research name availability — make sure no other business is already using your desired name in your state or county.
- Complete and file a Fictitious Business Name Statement at your local county clerk’s office. Expect fees of around $30-50.
- Publish the statement in a local newspaper for 4 consecutive weeks.
Once registered, you can open business bank accounts and merchant services using your DBA.
Acquiring Business Licenses
Most sole proprietorships need licenses and permits from both state and local agencies before opening their doors:
- Visit California’s CalGold portal to identify which specific permits, licenses, and registrations apply to your business activities and location. Apply through the relevant agencies.
- If you have employees (including yourself/contract workers), you’ll need an Employer Identification Number (EIN) from the IRS and have payroll taxes.
- Retail/e-commerce sites charging sales tax need a seller’s permit from the California Department of Tax and Fee Administration.
Factor these expenses into your startup budgeting. Non-compliance results in penalties down the road.
Registering for Taxes
One big perk of sole proprietorships is pass-through taxation – your business income/losses pass through to your personal tax return.
But you still need to take a few steps:
- When applying for your EIN, specify the business is a sole proprietorship owned by you. This connects the EIN to your Social Security Number.
- Track all business income and expenses. You’ll report them with your personal 1040 tax return.
For specific tax-related questions about your business, we advise consulting with a tax professional for guidance.
Maintaining Your Sole Proprietorship in California
Launching the business is one feat – scaling it is another adventure full of legal and financial choices.
Here are a few tips to keep your sole proprietorship in compliance:
- Document all transactions, payments, invoices, and tax records. Consider small business financial software or work with an accountant to stay organized. You’ll rely on these records to calculate profits/losses and prepare tax documents.
- Don’t let licenses expire. Mark renewal timelines on your calendar and budget for any renewal fees. Keep general business, health/safety, and industry-specific licenses current.
- Explore protection strategies. Consult with insurance brokers about plans covering your assets in case of property damage, lawsuits, interrupted operations, and more. For larger risks, discuss contingency plans with legal counsel as well. The right coverage provides peace of mind.
While sole proprietorships have less paperwork than other structures, staying legally compliant and financially sound is an ongoing endeavor. Master the fundamentals from the start and know when to request help.
Converting a Sole Proprietorship to an LLC
As your sole proprietorship grows and matures, you may consider forming a limited liability company (LLC) to gain additional legal protections.
Many founders choose to initially test their business concept as a lean sole proprietorship, then transition to a more formal structure once established.
Transitioning involves a few key steps:
- Form an LLC: File formation documents (Articles of Organization) with the CA Secretary of State. Appoint a registered agent. Establish an operating agreement detailing ownership percentages and rules.
- Transfer assets/accounts: Open new business banking accounts under your LLC’s name and EIN.
- Notify customers and stakeholders: Inform your vendors, customers, lenders, and anyone else connected to the business that you are now operating as an LLC rather than a sole proprietorship. Redistribute any important legal documents like contracts and leases to reflect this as well.
- Cease operations under the sole proprietorship: Wrap up the sole proprietorship by closing accounts, settling remaining expenses/receivables from its last tax period.
Consult legal counsel and accountants to ensure you handle the operational and tax aspects of converting correctly. But fundamentally – forming an LLC to succeed your sole proprietorship enables limited liability benefits while keeping business momentum smooth.
Contact TONG LAW to Ensure Smooth Business Formation
At TONG LAW, our business attorneys have helped California founders form and grow sole proprietorships while avoiding costly mistakes.
If you have questions or want personalized guidance on starting your new business, please reach out. Contact us online or give us a call to set up a consultation today.