As a new business owner, one of your most important decisions is determining what form of ownership will best meet your business needs. Selecting the best structure for your business should be a carefully planned process that is discussed with a qualified professional such as an enrolled agent, certified public accountant, or attorney who specializes in this area. In addition, as your business grows over time, you may want to evaluate if a new form of ownership should be used to achieve better results.
A sole proprietorship is the simplest and most common form used when starting a new business. A sole proprietorship is set up to allow individuals to own and operate a business by themselves. A sole proprietor has total control, receives all profits from, and is responsible for taxes and liabilities of the business.
Key Features of a Sole Proprietorship
- It is inexpensive to start a sole proprietorship.
- A sole proprietorship consists of an individual or a married couple. (Ownership by more than one individual or registered domestic partner (RDP) creates a partnership.)
- The business and the owner are one. There is no separate legal entity.
- The owner of the sole proprietorship controls the entire business.
- The sole proprietor is personally liable for all debts and actions of the business. Personal assets may be used to pay the debts of the business.
- The life of the sole proprietorship continues to exist until it goes out of business, or as long as the business owner is alive. Once the owner dies, the sole proprietorship no longer exists.
How to Form a Sole Proprietorship
- A separate bank account should be established for your business
- Depending on your business type and business needs, an evaluation of risk may need to be done. Consult an insurance professional and your attorney to determine if liability insurance is recommended or needed.
- Most cities and counties require a business license, various permits, and/or registration to do business within their city or county limits. If you are doing business in multiple cities or counties, you may be required to have multiple licenses. Contact the business licensing department of the city and/or county directly where your business will primarily be located for specific rules and regulations. The Governor’s CalGold online database at calgold.ca.gov, the Governor’s Office of Business and Economic Development (GO-Biz) at business.ca.gov, and the California Business Portal at businessportal.ca.gov all provide links and contact information to agencies that administer and issue business licenses, permits, and registration requirements from all levels of government.
- Contact your local Chamber of Commerce or call the statewide Chamber of Commerce at 800.331.8877 for information for your area and referrals to other agencies.
- Small Business Development Centers (SBDCs) provide assistance to small businesses throughout the United States and its territories. SBDCs help entrepreneurs realize the dream of business ownership and help existing businesses remain competitive in a complex, ever-changing global marketplace. SBDCs are hosted by leading universities and state economic development agencies and are funded in part through a partnership with SBA. For more information on SBDCs go to sba.gov/tools/local-assistance/sbdc.
- If required, register a fictitious name, also referred to as “Doing Business As” or DBA. Refer to Appendix 1 in this booklet for more information.
- No formation documents are required to be filed with the Secretary of State.
Tax Return Filing Guidelines for a Sole Proprietorship
- Use a federal Schedule C, Profit or Loss from Business to report business income and expenses.
- If you operated more than one business as a sole proprietorship, use a separate Schedule C for each business.
- Report the net income or loss from the Schedule C on your California individual income tax return, Form 540, California Resident Income Tax Return or Form 540NR, Nonresident or Part-Year Resident Income Tax Return.
- Include a complete copy of your federal return, including Schedule C, with your California individual income tax return.
- There is no requirement to file a separate tax return for the business. The due date of the federal return (including Schedule C) is the same as your California individual income tax return (with a copy of your federal return and Schedule C), which is normally April 15.
- The tax rate of the return depends on your individual income tax rate.
- California taxes are pay-as-you go.
- Estimated tax installment payments for individuals are due and payable on April 15, June 15, September 15 of the taxable year, and January 15 of the following taxable year.
- Individuals complete California Form 540-ES, Estimated Tax for Individuals, to report their estimated taxes.
- A sole proprietorship will include all sources of business and personal income, such as wage and investment income, when determining estimated tax payments.
- Generally, you must make estimated tax payments if you expect to owe at least $500 ($250 if married/RDP filing separately) in tax for the current year (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of: 1). 90 percent of the tax shown on your current tax return; or 2). 100 percent of the tax shown on your prior year tax return including Alternative Minimum Tax (AMT).
If you pay a California nonresident for services they performed for your business while they were in California, generally, you must withhold 7 percent on all payments that exceed $1,500 in a calendar year.
If you backup withhold for the Internal Revenue Service, you must also backup withhold for the Franchise Tax Board on California source income. Backup withholding applies to California residents and nonresidents who do not provide a taxpayer identification number or do not certify exemption from backup withholding when required.
For more information about withholding, refer to FTB PUB 1017, Resident and Nonresident Withholding Guidelines.
How to End a Sole Proprietorship
- File a federal Schedule C with your federal return and file a California return, with copies of your federal return and Schedule C, for the year you go out of business, or the year of the sole proprietor’s death.
- File tax returns for any delinquent tax years.
- Pay all outstanding tax liabilities and penalties.
- Notify all creditors, vendors, suppliers, clients, and employees of your intent to go out of business. If the sole proprietorship ends because of the death of the sole proprietor, creditors may be entitled to an additional notice in the event of a probate or trust administration. Consult with a probate attorney, if necessary.
- Close out business checking account and credit cards.
- Cancel any licenses, permits, and fictitious business names.
- Consider publishing a statement in a local newspaper of general circulation near your principal place of business that you are