What is a Sole Proprietorship?

The most common type of new business is a sole proprietorship. A sole proprietorship is a type of business entity that consists of only one individual that wholly owns the company and runs the company in its entirety. A sole proprietorship views the individual and the company as the same, for legal purposes. Individual taxpayers, as well as married couples, are eligible to start a sole proprietorship. A business classified as a sole proprietorship will remain active until dissolution occurs or the death of its owner. In California, a sole proprietorship does not need to register the business with the Secretary of State, but may need to register their name.

What are the Liabilities of a Sole Proprietorship?

Having a sole proprietorship offers no legal protection to an individual. The business owner's assets are at risk, and they will be personally liable for any debts, liabilities, and taxes incurred by their business. The business classification for a sole proprietorship is a pass-through entity, which means all of the business profits will pass down to the owner of the company and taxed as personal income.

Steps to Begin a Sole Proprietorship in California:

In comparison to other business entities, beginning a sole proprietorship in California is relatively simple and straightforward.

1. Choose a unique name for the business.

Take the time to research business names. The chosen name must be unique and not too similar to other existing businesses registered in the state. The chosen business name also must not be misleading.

2. File a Fictitious Business Name Statement or DBA (Doing Business As) notice with the county's recorder.

If the name chosen for the business includes the last name of the business owner or if the business owner is planning on only using their name for business purposes, then it is not a requirement to file a Fictitious Business Name Statement in the state of California. If the business name will not include the name of the business owner, there is a grace period of only 40 days from the business' start date to file a Fictitious Business Name Statement. To complete the registration of a Fictitious Business Name in California, the owner must publish the name in a well-known publication in the county of the business's location consecutively for four weeks.

3. Obtain an EIN (Employer Identification Number) from the IRS

An EIN is only mandatory if the business is planning on hiring employees. There are benefits to obtaining an EIN even if the owner will be the only individual conducting business for the company. An EIN will allow the business owner to open business accounts as well as offer a level of identity protection bypassing the use of their social security number.

4. Obtain any licenses and permit required

Take the time to research the requirements in the particular county and city of the business location. Most counties will require that all entities doing business obtain a business license. Depending on the line of work for the company, there may be additional requirements, like a vendor license or a home-based license. If the business is operating out of a storefront or other location, the owner will also need to obtain all necessary permitting and zoning approvals required to run their business.

5. Get your business up and running

Once the business has established its sole proprietorship status with the State of California, the owner may then proceed in obtaining any other necessities to get the business up and running. These necessities could include bank accounts, liability insurance, accounting designations, and tax reporting requirements.

Starting a sole proprietorship is a process. This simple guide overviews what creating a sole proprietorship entails. This article is not legal advice. However, the formation of any business can benefit from having an attorney to guide the process. Contact the Berglund Group today for a free consultation.

The blog posts provided on this website do not, and are not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only.