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Starting a business in The Golden State is quite easy, especially if you are a sole proprietor. So it's no surprise that this is the most common type of business model. As a sole proprietor, you are the owner of your own business and are self-employed. To get started, all you need to do is launch business operations.
However, as with every state’s legislation, there are a few things to keep in mind when starting a sole proprietorship in California. In this guide, you will learn what it takes to be a sole proprietor in California, and what steps to take to improve and safeguard your business.
With sole proprietorship comes great responsibility
With sole proprietorship, the company and the owner don’t exist apart from each other. They are one and the same. Although this might be simple enough, debt, legal and business obligations all fall on you. This can quickly become stressful if you don't have the right tools to manage it. Here are a few things to keep in mind when running a thriving business of your own:
- Position yourself as a leader: Whether that means faking it ‘till you make it or embodying the experience that you’ve gathered over the years, positioning yourself as the leader of your company will put you in the right mindset to run a successful business.
- Follow best practices: Learn what it takes to be a sole proprietor in California and steps to take to succeed in your industry. That way, you are better prepared to safeguard your business and have a roadmap of how to grow your company.
- Do the work: Taking action will always get you further than overthinking about doing something.
How to Start a Sole Proprietorship in California
California is a very appealing place to start a sole proprietorship because it has almost no cost and no barriers to get started. Business owners can start a California sole proprietorship without filing any legal documents with the Secretary of State. In the Golden State there are only two required steps to start your sole proprietorship and the following ones are generally recommended but not mandatory.
1. Required: Choose a Business Name
To begin, pick a business name. When doing so, make sure you choose a name that’s not similar to an already-existing company. To make sure your name isn't already in use, you can take a look at these websites:
The California Secretary of State website: Search both corporations and limited liability company (LLC) categories.
U.S. Patent & Trademark Office: Make sure your name hasn’t been trademarked by someone else.
Once you know you can use the name you want, you must file the name in the recorder’s office in the county where the business is located.
2. Required: Obtain Licenses, Permits, and Zoning Clearance
This is a key step before beginning business operations. To check what licenses or permits are necessary for your sole proprietorship, go to the CalGold database. By searching on the site, you'll be able to determine whether your business needs a general city business license or a professional license.
3. Optional: File a Fictitious Business Name Statement
California requires you to file a Fictitious Business Name Statement if you use a name that's different from your legal name. This can be done in the County Recorder's office where your business is located. The filing fee is $26. Additionally, the business owner must also publish a statement in a well-known newspaper within the county for four consecutive weeks to finalize the registry of a fictitious business name.
4. Optional: Obtain an Employer Identification Number
If you are going to hire employees for your business, you'll need to get an Employer Identification Number, or EIN. This is a nine-digit number provided by the IRS for tax reporting purposes. To register for an EIN, you can go on the IRS website.
Next Steps After Starting a Sole Proprietorship in California
Once you have established your sole proprietorship, consider doing the following if you find your business needs it:
Open a Business Bank Account
Creating a separate bank account for your business is a good practice for tax purposes. To open your business bank account, you'll need your EIN, social security number, a copy of the business name filing and if it’s applicable, your business license if your business requires one.
Get General Liability Insurance
When you're a sole proprietor, you and the business are one and the same when it comes to legal issues. Although you are not required by California law to have insurance, as a sole proprietor, you are responsible for all debt and are personally liable for anyone that sues your business. Determining how much business insurance you need is key, especially if you are responsible for employees. If you do have employees, you may want to consider getting workers' compensation insurance and business liability insurance. These will come in handy when unexpected situations happen. Coverage from a California licensed insurer is your safest bet, and workers' compensation insurance can be managed by The California Division of Workers' Compensation.
Report and Pay Taxes
As a sole proprietor, you pay your taxes as an individual. However, because you don't have an employer handling them for you throughout the year, taxes are a little different. Sole proprietors can find tax forms on the U.S. Small Business Administration. Make sure you pay your estimated quarterly taxes as well as the self-employment tax. Additionally, for part-year and non-residents, once more than 45 days are spent in California, you are required to file resident returns and report your worldwide income.
Pros and Cons of Sole Proprietorship in California
Sole proprietorship is a very convenient business model. So it's no surprise that there are over 23 million registered businesses of this type in the United States. However, before getting started, it’s important to take well-informed decisions. Here are a few pros and cons of sole proprietorship:
Pros of Sole Proprietorship in California
- Easy to set up: Sole proprietorships aren't required to be registered with the state of California, which makes it much easier than starting other enterprises. Other types of businesses often require a lot of paper work and time-consuming activities like choosing a board of directors and allocating stock to shareholders. Depending on your type of business you may need licenses and permits to legally operate, but otherwise, as a sole proprietor, all you have to do is launch business activities.
- Simple to manage: Conflicts between business owners are one of the main reasons why businesses fail. However, as a sole proprietor, you are in full control of business decisions, income, and planning, which makes running the business easier.
- Straightforward taxes: All business earnings are reported as your personal income tax return. Additionally, as a sole proprietorship, you can also access to certain tax deductions. For example, the Tax Cuts and Jobs Act of 2017 allows a 20% tax deduction from your business income.
Cons of Sole Proprietorship in California
- All the liability is on you: Sole proprietors are personally liable if someone takes legal action against your business. If you aren't covered by insurance, this means your personal assets like your home, credit score, or personal savings can be taken if you lose the case.
- Self-employment tax: When you're self-employed, you have to chip in for Medicare and Social Security taxes. This amounts to a 15.3% tax on top of your regular income taxes.
Landing new clients can be challenging: While being your own boss can be great, it's also challenging. You're solely responsible for bringing in leads and investors. Additionally, big clients often see sole proprietors as less professional than LLCs and corporations and may not take your business seriously.