The How-To Guide to Become a Sole Proprietor in California

Want to start a business, but not sure where to start? The simplest, and most cost-effective method that people start out with is a sole proprietorship. A sole proprietorship is an unincorporated business owned and operated by a single individual. The sole proprietorship is taxed as a pass through entity, meaning that the business and the business owner are taxed as one and the same. As such, a sole proprietorship does not separate business assets and personal assets. As your business grows, it may make more sense for you to transition into another type of business, such as an LLC. However, because sole proprietorships are fast, easy and cost effective to set up, they are extremely popular as the first type of business entity that an individual may start with.

If you are self employed, you are automatically defaulted to a sole proprietorship. Nothing specific needs to be filed in order to create a sole proprietorship for yourself. However, any business entity — including sole proprietorships — will need to have a series of licenses, fees, and permits that they are required to file and pay. Each of these fees and licenses will be dependent on the city, county, state, and the industry you are starting your business in.

Many people who want to start their own business are overwhelmed at exactly where to start and which steps they must follow. But have no fear, you will find a step by step guide of exactly how to start your sole proprietorship below.

Step 1

Your first step is to visit the website CalGold. On CalGold, you will enter the city and industry you will be working in. Calgold is going to generate a list of permits, licenses and other things needed in order to form a legal business entity in your industry, city, and county. In addition to that, there will also be addresses, phone numbers, and links for exactly where you can obtain those permits and licenses.

Step 2

The next thing that you’re going to need to do is obtain a business license — also known as a business tax certificate. You will also need to decide what business name you will be operating under. As a sole proprietor, you are allowed to operate under your first and last legal name without filing any additional paperwork. However, if you are not using your first and last legal name exactly as it appears, then you will need to file a Fictitious Business Name Statement, also known as a Doing Business As Statement — this is also known as a DBA.

Most county clerk recorder’s offices will require you to publish your new business name in a local newspaper that they have on their pre-approved list. When you file your DBA — if you are required to publish it in a local newspaper — the office will provide you with instructions as well as a list of approved publications.

Step 3

The next step will apply to some, but not all, sole proprietors. If you plan on selling tangible products, you will be required to obtain a seller’s permit. This does not apply if you are selling your tangible products through the use of a marketplace facilitator. A marketplace facilitator is a third party company that sells your products and collects and remits the sales tax — sales tax is required to be remitted to the CDTFA. If your marketplace is collecting and remitting the sales tax, then they are most likely a marketplace facilitator and you are not required to obtain a seller’s permit. If you need more information on obtaining a seller’s permit and more information about the Marketplace Facilitators Act, you can click here to learn more.

Step 4

The next step is optional; it is obtaining an EIN number, which is an employer identification number. Sole proprietors are not required to obtain an EIN because sole proprietors are not a separate business entity. As a sole proprietor, you and your business are one and the same. In place of an EIN, your social security number is used for taxation purposes. If you plan to have employees in the future, or if you prefer to use an EIN number as opposed to your Social Security number, then you may obtain one. Getting an EIN number is fast, free and easy — do not pay a third party to obtain an Ein number. You can click here to find exactly where you can obtain your EIN.

Step 5

The next step is also optional, but I would strongly recommend that you set up business bank accounts — both a business checking account and a business savings account. Setting up business banking from the beginning will streamline your bookkeeping and your taxes. All of your business expenses should be paid for using your business checking account — no personal expenses should be used with this account. Having business banking set up from the beginning will help simplify your record keeping come tax time.

Opening up a business savings account will also help you save for taxes throughout the year. As a self employed individual, you’re going to be required to pay self employment income taxes. If you would like to learn more about self employment taxes, you and click here. However, you will generally want to set aside 30% of your income for self employment taxes. Set this percentage aside into a separate savings account do not touch it — this will ensure you have enough to pay your income taxes. Additionally, if you’re making tangible sales, you will be required to remit sales tax to the CDTFA. Once you collect your sales tax, save it in a separate savings account and only use those funds to pay your sales taxes.

Step 6

Lastly, while this step is optional, I strongly recommend you obtaining business insurance. If you have any sort of equipment that is required in order to perform your job, I strongly recommend that you get it insured. Getting your equipment insured means that if something is damaged or broken — and it’s an essential tool to perform your job — you’ll be able to get it replaced quickly and easily, at little to no cost.

In addition to equipment insurance, you should also hold general liability insurance if you are a business that works directly with clients. If you work directly with clients and there is potential for anyone to get injured, you will want to cover your business with a liability policy.

I’m not in California, where can I find more information?

Most of the information I provide is for individuals in the state of California. However, I’ve linked the IRS webpage here that will help you find more information on how to start your business in your specific state.

Want to learn more about starting your sole proprietorship? Watch the video here!