If you live in California, it’s not really surprising if you decide to run a business of your own. California residents are generally brave and adventurous, and plenty of them like to blaze their own trail. While there are plenty of ways of establishing your business (such as forming an LLC or a corporation), you can just do it the easy way and form a sole proprietorship in California.
What’s a Sole Proprietorship?
When you form a corporation or a limited liability company, you basically build a separate business entity that’s distinct from your own person. You and your business are separate from one another. That’s the crux of the matter, because that means you’re able to separate your business assets from your personal assets. That way, your business creditors can’t come after your bank account and your home to cover your loans.
The sole proprietorship is the opposite. You are the business. There’s no separation. While this may risk your own money as part of the business, it’s a risk you’re willing to take.
In addition, it comes with a lot of benefits.
- It’s easy to form. You don’t even really need to go through a formal formation process. That means you can just start working, and your business is automatically regarded as a sole proprietorship.
Taxes become super-simple. California does not charge state income taxes for its residents. It’s also true that it doesn’t impose an annual tax or franchise tax on corporations. Sole proprietorships, like California corporations, don’t have to pay these taxes as well. However, you do have to check the Tax Service Center in California to be sure you’re compliant.
- You can act more freely and more quickly when it comes to contracts and banking. You can just sign your own name to a contract (you are your business, after all). You can use your own personal bank account for your business as well. You can just do anything you need to maintain your business, as long as it’s legal. You don’t have to follow any operating procedures you may have created prior to forming your business.
Forming Your Sole Proprietorship in California
As we’ve already mentioned, you can just start working. There’s no formal formation procedure to follow, and hence, no formation fees to pay.
But you may want to take several of the following steps to help you grow your business more successfully:
Pick a Business Name
How will people refer to your business? You can always use your personal name, but you can also use a trade name. This is your DBA name, as it’s the name you use when doing business as.
A trade name distinguishes your business, and gives a more professional image than just using your personal name. Strictly speaking, your DBA name doesn’t really have to be very different from all the other DBA names in California. Still, it’s always a good idea to select a unique name. If you share the name with another business that makes poor PR choices (such as forward offensive or racist opinions through social media), then your own brand will be dragged through the PR mud. You can check your name availability here.
You can also file a name registration for your DBA. Your DBA goes into the DBA database, to make sure that other businesses don’t inadvertently use your business name. You must file your DBA name with the county where you open your business after you have confirmed that the name is available, this must be done to register the name. After this, you’ll publish a statement in a reputable newspaper of the county for 4 consecutive weeks.
Register Your Domain
Just about every business these days has an online presence. That’s because the cost of establishing and running a website is low compared to the benefits you reap. You now have lots of web pages you can use to advertise your items and services. You can use it to sell stuff, or for marketing.
It’s so useful to have your own website that for many years now, many consumers don’t really trust a business without its own website. While you can use your own Facebook account for this, you may as well register your business domain and establish your own website. It’s not even all that difficult, with online services such as GoDaddy ready to help out.
Get the Necessary Local Permits and Licenses
The California state website helpfully offers a huge website listing all occupations and professions that require a license. You can get the information about the required licenses and permits of your business on the CalGold license and permit page of the State of California. Then you should check your local regulations as well, so you can find out about necessary local permits, licenses, and zoning clearances.
Licenses for certain professions are set up to make sure that businesses operate safely. For example, if you’re planning to set up a tattoo parlor in California, then you may need permits pertaining to medical waste regulations and your water supply.
Get Your EIN
If your sole proprietorship business will involve hiring employees, then you will have to get your EIN, or Employer Identification number. It’s easy enough to obtain, simply by going through the steps on the IRS website. You don’t even have to pay for it.
In the end, you then get a 9-digit number that you then can use for employment tax purposes. You’ll need to use the EIN to report your wages to the IRS.
You don’t have to get your EIN if you’re going solo and you don’t have any employees to deal with. You can just simply use your own Social Security number, since your income tax is the same as your business tax in the eyes of the IRS.
But you may still want to get your EIN even without any employees, since it’s easy enough and free to boot. That way, when you do decide to get an employee, you’re ready. You may also need the EIN to report taxes to the State of California. Some banks may even require the EIN to open a bank account, since the EIN also helps in reducing the chances of identity theft. It’s another layer of protection for you.
With your EIN, you can now establish a different business bank account that’s separate from your personal finances. That way, you can better track your business expenses and profits.
Get Some General Liability Insurance
Since you are not distinct from your business unlike LLC or corporation, you may be held personally liable for all your business debts. But you can set up some form of financial protection by getting a business liability insurance policy. It works like other types of insurance policy—it may be possible for the insurance company to cover your financial obligations when disaster strikes.
Sole Proprietorships are terrific for many small businesses that are just starting out. You’re not hampered by too many rules, and you’re free to act quickly. While you’re risking your own personal assets, with many small online businesses this isn’t really a true risk.
Just follow our tips listed here, and you may well start a great California sole proprietorship that should augment your other sources of income!