How to Start a Sole Proprietorship in California
Starting a business in California can be an exciting endeavor. One of the first steps you’ll need to take is deciding your business’s legal structure. The most common structure used by new businesses is a sole proprietorship. But what exactly is a sole proprietorship, and how do you start a sole proprietorship in California?
In this guide, we’ll go over what a sole proprietorship is, its advantages and disadvantages, and how to start a sole proprietorship in California.
- What is a California Sole Proprietorship?
- How to Start a Sole Proprietorship in California
Sole proprietorships are the most common and simple form of business, especially for new businesses in California. Sole proprietorships are an informal business type, meaning that they are not formally recognized as separate from the owner.
If you operate a California business as the sole owner and don’t take any steps to form your business as an Limited Liability Company (LLC) or Corporation, you are a sole proprietor. Once you start to conduct business activities as a single person, you are a sole proprietor by default.
Starting a business as a sole proprietor is very popular because you can get started without paperwork. Thus, they can be a great option for people looking for the cheapest and simplest way to start a business.
However, sole proprietorships also have some disadvantages that need to be considered. Since a sole proprietorship does not create a separate business entity, they leave the business owner with unlimited liability risk. If a lawsuit is filed against the business or the business has debts that cannot be paid, the owner can be held personally liable. This means that the business and individual who owns the business are viewed as the same and that the owners’ personal assets can be seized or used to resolve lawsuits or repay debts. This is one of the key differences when comparing an LLC vs a sole proprietorship.
For a full breakdown, check out our guide on the advantages and disadvantages of sole proprietorships. This guide details the 4 main advantages and disadvantages that new business owners should be aware of when operating as a sole proprietor.
When starting a sole proprietorship in California, there are 5 steps that you’ll need to complete:
- Come Up with a Business Name
- File for a Fictitious Business Name
- Obtain Business Licenses and Permits
- Get an EIN
- Open a Business Bank Account
The first step to starting a sole proprietorship in California is coming up with your business name. Having a good business name that’s unique, memorable, and easy to search for is crucial for your business’ success. Ideally, you want to do some brainstorming and come up with a few names developed using different concepts so that you have a few options, just in case the name you’d like to use most is already in use. If you need some help and tips to develop the perfect business name, you can use this guide for help. It contains 15 different tips to keep in mind to provide some extra inspiration for your business name.
Once you have a few good business name ideas, you’ll want to verify that no one is currently using your desired name. To verify this, you’ll want to search within the two primary government sources:
Besides ensuring that the name is available for use in your state and has not been trademarked, you will also want to verify if the website domain name is available. While this is not required, having the .com version of your business name will be essential to maximizing your marketing efforts.
When someone searches your business name, you want the best chance possible of showing up first on Google. Having the website domain that exactly matches your business name will go a long way to making that as likely as possible, even if you don’t plan on building a website. It’s highly recommended so no one else can register that domain name. Considering that it costs around $10 per year for a domain name is almost a no-brainer.
Once you have determined the business name you want to use and verified that it’s available, you’ll want to register a Fictitious Business Name. For sole proprietorships, if you operate under a name that does not include your personal name, you’ll need to have a Fictitious Business Name. Fictitious Business Names can also allow you to brand different products and service lines.
In California, Fictitious Business Names (DBA) are managed and issued at the County level. To complete your Fictitious Business Name filing, you’ll need to complete the application and submit it with the application filing fee to the county clerk’s office. To complete a California Fictitious Business Names (DBA) filing, you’ll need to provide the following information:
- Business Name
- Business Address
- Your Name and Address
If your looking for more in-depth information, visit our guide on how to get a Fictitious Business Name (DBA) in California.
Alternatively, you can use a third-party filing service to complete your Fictitious Business Name application and submit it for you. This can give you extra peace of mind, knowing that your filing is submitted correctly and ensuring a higher likelihood that your Fictitious Business Name will be approved.
Depending on your business’s nature, you may need to get a business license or professional license. A full list of the required licenses and permits for California businesses can be found here. You will also need to ensure that your business is not subject to federal licensing. Visit the sba.gov business license page for a full list.
Outside of state-level licenses and permits, city and county regulators also issue licenses and permits. Common types of licenses and permits issued at the local level include building and occupational permits, signage permits, zoning clearances, and safety and health-related permits.
The business licensing process can be quite complex depending on your business, so you may want to opt for a business license research package. These services are conducted by business licensing and permitting experts who will provide you with an exhaustive list of the business licenses and permits your specific business will need.
If you have employees, you are required to get an EIN. EINs are a nine-digit ID number issued by the IRS to identify businesses for tax purposes. You can apply for an EIN for free online using the IRS’ EIN Assistant.
If you don’t have employees, you are not required to get an EIN as a sole proprietor. However, it can be useful to get an EIN. They are often required to open a business bank account and can be used in place of your social security number for most business applications.
Important Note about Sole Proprietor EINs:
Since sole proprietorships are not viewed as separate from an individual, sole proprietor EINs are issued under their names, not their DBA names. As a result, you will only be issued 1 EIN as a sole proprietor for your lifetime. This will be used for any and all businesses you will operate as a sole proprietor. If you apply for an EIN as a sole proprietor and receive reference error 101, this likely means that you have already been issued an EIN previously. If you cannot recall your EIN or have not been issued an EIN previously, you will need to call the IRS Business and Specialty Tax Assistance line at 1-800-829-4933 and use the prompts related to reference number 101.
The final step to making your California sole proprietorship a reality is to open a business bank account. It’s important to keep your business and personal transactions separate to prevent the co-mingling of funds. The easiest way to do this is to open a designated business bank account and use it only for business transactions. This will make it easier for you to complete your accounting and bookkeeping tasks.
Check out this helpful guide to learn how to opening a business bank account.
Other Items to Consider
Once you have established your sole proprietorship, you will also want to complete these important tasks:
- Setup Credit Card Processing:
Considering that over 60% of transactions are done via debit and credit cards, it’s essentially a requirement to accept credit card payments. We go over how to do this in our How to Accept Credit Card Payments guide.
- Establish an Accounting System:
You’ll need to determine the accounting method you will use for your business: cash basis accounting vs. accrual accounting. To learn more, check out our guide on small business accounting 101.
- Get Business Insurance Coverage:
As a sole proprietor, you lack personal liability protection, so getting adequate business insurance could be your only financial protection method. Learn more about business insurance here.