What Qualifies You As A Sole Proprietor
A sole proprietor is an individual operating a single-person business and owns all the assets and liabilities. Theres no separate legal entity. You and your business are one in the eyes of the law and taxes..
A sole proprietorship can only have one owner. Hence the world sole! If you bring in another person to co-own the business, it becomes a partnership by default.
Sole proprietors are commonly called self-employed, though youre not technically an employee of the business, because the business isnt an entity separate from you . We tend to use the term self-employed in this case, though, because it points out a key factor of being a sole proprietor: Youre not an employee of someone elses company.
If you sell services as a sole proprietor, you most likely work as an independent contractor with clients. That designation is important on the employers side, because a company has very different legal and tax obligations toward employees versus independent contractors. For your purposes i.e. taxes and legal liabilities the business structure is sole proprietorship
Not all sole proprietors are independent contractors, though. If you sell goods, you dont generally have any contractual relationship with your customers, but youre still in business as a sole proprietor.
S To Start Sole Proprietorship In California
One of the simplest forms of California business entity is a sole proprietorship. So, how does the filing of sole proprietorship in California process work? It is a fact that the process for starting a sole proprietorship business is quite simple as compared to other forms of businesses like an LLC or a C-Corp. One of the advantages this type of business has over other businesses is that you are not required to register your new business with the California Secretary of State. Simultaneously, there are several state based regulations and requirements that you need to consider, so that you are able to form a new business without any glitches. The following steps will provide guidance in terms of how to start a sole proprietorship in California correctly while remaining compliant with all state regulations.
Select A Business Entity
The next step in starting a business in California is selecting the type of business entity.
The business entity is sometimes referred to as a business structure or legal structure, which refers to how a business is legally organized. There are four primary business entities: sole proprietorship, partnership, corporation, and Limited Liability Company . A brief description of each is below.
A Sole Proprietorship is an individual that decides to go into business. This is the easiest and least expensive of the four entities to set up as there is no state filing. The ease of startup is a big selling point, however, a major downside to the sole proprietorship is that the owner is personally responsible for all debts and actions of the company. If the business is sued, the owners personal assets are potentially at risk. Another potential downside is the owner will pay self-employment tax on all business profits and may be more costly than some of the other entities.
Related: How to form an LLC in California
Forming a corporation or LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
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Advantages And Disadvantages Of Sole Proprietorships
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.
Recommended Content: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.
How Long Does It Take To Start A Business In California
Starting a business can take anywhere from just a few days for a sole proprietorship, to two months or longer for a corporation. It depends on the structure of your business, the complexity of operational requirements such as permits and licenses, and the speed at which you are able to assemble the required documents and fees,
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Choose Your Business Name
The first step towards filing a sole proprietorship in California is choosing a business name. Every business or a brand has to have a name as this name is what your prospective customers will remember. It often creates the first impression with prospective customers and investors. A business name can also help in communicating your business strategy and the type of product or service you are offering e.g., the name Samâs Car Rentals translates into the fact that the business offers car rentals for tourists, conference attendees, and business people.
A sole proprietorship can exist under the legal name of the owner but sometimes an owner may want to use a different name for several reasons. These can be for marketing and advertising purposes. It is important to note that the name you choose should be distinguishable from the name of any other business although it can be a close variation. At the same time, you need to ensure the name is not misleading to the public. For example, if you add L.L.C or INC. to your name then that would be misrepresentation of a sole proprietorship firm.
One of the ways to check for the originality of the business name and ensure its availability in the state of California is by conducting a business name or entity search.
Obtain Business Licenses And Permits
There isnt a requirement in California for sole proprietors to acquire a general business license, but depending on the nature of your business you may need other licenses and/or permits to operate in a compliant fashion.
California has a myriad of permits and licenses that apply to businesses in particular industries, so you should use the states CalGold permit and license search to find if you must obtain any permits or licenses to legally conduct your business in California.
In addition, you should check to see if your business needs any licenses or permits on the local level.
All of Californias major cities including Los Angeles, San Diego, San Jose, San Francisco, and Fresno have their own requirements, so you should check with your local government to ensure that you are in compliance with all licensing and permitting standards.
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Position Your New Sole Proprietorship For Success
Starting a business as a sole proprietor is one of the biggest choices youll ever make. Though the risk is great, so is the reward and the best part is that you can start it on your own without leasing a building, hiring others, or requiring expensive training. With the steps I shared in this post, youll build a strong foundation to ensure lasting success.
Editor’s note: This post was originally published in September 2018 and has been updated for comprehensiveness.
Ease Of Setup And Maintenance
The primary advantage of a Sole Proprietorship is how easy they are to set up and to maintain.
In fact, there is no form to file in order to create one. If youre doing business by yourself, youre operating as a Sole Proprietor.
Think of it this way: once you engage in business activities, with the goal of eventually making money, you are operating as a Sole Proprietorship.
For example, if you want to start a wedding planning business, the moment you begin doing business research, calling potential customers, or building your website, youre operating as a Sole Proprietorship.
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Disadvantages Of A Sole Proprietorship
However, with a Sole Proprietorship, you also have the following drawbacks:
- Theres no liability protection against commercial debts, lawsuits and other obligations. This means you can be sued personally for commercial activities, putting your personal assets at risk.
- Outside of friends and family, its nearly impossible to secure equity financing for a Sole Proprietorship, as many investors choose not to invest in a Sole Proprietorship. This could limit the amount of funds available to grow, develop, and sustain your business.
- Its difficult to establish business credit to obtain debt financing for a Sole Proprietorship, as many financial institutions will categorize your request as a personal loan rather than a business loan, which brings all sorts of caps in terms of approval amount potential.
- You will have a lower amount of market credibility by not operating under a trade name. Now this could be easily resolved by creating a Doing Business As Name with your states department of revenue or the secretary of state, but this will require fees for establishment and ongoing fees to continue to use the DBA name.
Set Your Business Up for Success & Scalability
Make sure youre taking all the right steps to establish your business and build your business credit. Our course will guide you step by step so you can create a solid foundation and grow your business.
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Disadvantages Of Sole Proprietorship
- You might need a business license. The state of California doesnt require a business license to operate. But your city or county might. Depending on the goods or services you sell, you might also need a professional or occupational license.
- Youll pay the self-employment tax on everything you earn. When you work for an employer, the company pays payroll taxes automatically out of your paycheck. In addition to pulling out what you owe, they also chip in for Medicare and Social Security taxes on your behalf. When youre self-employed, you pay that, which amounts to a 15.3% tax on top of your regular income taxes. If you form an LLC instead of a sole proprietorship, you have the option to file taxes as an S Corp, which gives you a way to structure your pay that reduces that tax burden.
- You have to pay estimated taxes quarterly to keep up with contributions throughout the year. You cant just wait until tax time because you dont have an employer pulling taxes from your paychecks. This doesnt increase the amount you pay, but paying in chunks every few months can feel like a bigger blow especially when youre used to a smaller amount coming out of your paycheck every couple of weeks. . Its also unpaid administrative work you have to take on as a business owner.
Pro tip:You can protect your assets against business liabilities, even as a sole proprietor, by purchasing liability insurance.
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Opening A Solo Law Practice In California: Incorporation Vs Sole Proprietorship
The article below was published in 2012.
Congratulations on starting your own solo law practice in California! But first, youll have to decide what form your practice will take sole proprietorship or corporation. Those are your only two options because partnerships and limited liability partnerships are out. By definition, a solo attorney does not have a partner. The LLC option is out because the California Legislature says so it has prohibited licensed professionals, including accountants, doctors and lawyers, from organizing as limited liability companies . Corp. Code §17701.04.
And thus, you are left with two options: sole proprietorship and corporation. Sadly, the decision ultimately turns on how much income you expect to make and the tax consequences associated with that choice. So, youre making the choice based on a guess. Its the first of many.
Thankfully, whatever you choose, you can always change it going forward or have both a corporation and a sole proprietorship running in parallel. On a personal note, at the end of 2011, I dissolved my law corporation after three years and now operate as a sole proprietorship. Looking back, I wish Id done it sooner.
It Consultant Or Computer/it Specialist
Have you ever run into IT problems? So do countless businesses. As an IT consultant running your own business, you would offer IT troubleshooting services to other companies, resolving issues with both the companys hardware and software solutions. Be open to traveling for this type of sole proprietor business.
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Get An Ein From The Irs
However, a Sole Proprietor also has the option of getting an EIN Number from the IRS.
EIN Notes
Whether or not you get an EIN for your Sole Proprietorship will not impact your taxes. Your taxes will be filed the same either way.
An EIN is also called a Federal Tax ID Number, Federal Employer Identification Number, Employer Identification Number, or FEIN. They all mean the same thing.
Getting an EIN for your Sole Proprietorship may be a good idea for a few reasons:
Safety
Without an EIN, you may need to use your SSN when dealing with vendors and clients. For example, if a client pays you more than $600 per year, youll need to provide them with IRS Form W9.
Instead of using your Social Security Number, you can list your EIN instead on Form W9.
The same thing can also apply to online account setups and other places you may do business with.
If you hire employees
In this case, an EIN isnt optional its required. If you want to hire employees for your business, you will need to obtain an EIN first. This is because an EIN is required in order to pay payroll taxes for your employees.
Note: As a Sole Proprietor, while you are considered self-employed, you are technically not an employee.
To Establish A Sole Proprietorship In California Here’s Everything You Need To Know
In California, you can establish a sole proprietorship without filing any legal documents with the California Secretary of State. There are four simple steps you should take:
1. Choose a business name.
2. File a Fictitious Business Name Statement with the county recorder.
3. Obtain licenses, permits, and zoning clearance.
4. Obtain an Employer Identification Number.
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Make Sure To Pay Attention To The Following Three Aspects
There are obligations to pay taxes to the state
A business owner and an individual entrepreneur are the same people. It means that filing tax returns is not a requirement, as with an entity or LLC. You need to declare your income and expenses and fill out the declaration of an individual
Signing contracts
Business owners who are registered as sole proprietors have the right to enter into contracts on their behalf, unlike an entity. Also, receiving profit from clients, in checks they can indicate their name in the recipient column
Flexible terms of business management
The advantage difference between individual entrepreneurship and any entity is the ability to combine work and personal assets. Whereas corporations and LLCs must separate personal assets from company assets. It has several positive and negative aspects. For example, if you have financial difficulties, creditors can seize or confiscate your personal property . In the case of corporations and LLCs , creditors do not have this freedom, as their powers only apply to business assets.
How Do I Start A Sole Proprietorship
Starting a sole proprietorship is simple, although the specific steps you take may vary depending on where you live. In most states, you need to follow these three steps to become a legal entity:
Steps to start a sole proprietorship
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Do I Have To Pay Franchise Tax In California
In general, every California corporation that is incorporated, qualified for business, or doing business in California is required to pay a franchise tax of $800. The first taxable year of a corporation incorporated in California or qualified to conduct business in California is exempt from paying the minimum franchise tax.
Sole Proprietorship & Fictitious Business Name
If you operate as a Sole Proprietorship, you can avoid all business filing requirements if the name of your business, includes at least your last name, and portrays the nature of your business
However, if a Sole Proprietorship is operated under a name that does not include the owners last name or portray the nature of the business, the owner must file a Fictitious Business Name Statement in the county of the firms principal place of business. A Fictitious Business Name is also required if the name suggests the existence of additional owners .
Legal Tip: The filing of a Fictitious Business Name is governed by the California Business & Professions Code section 17900.
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