What Defines a Sole Proprietorship in California?

what defines a sole proprietorship in california?

If you own or plan to start a business, you’ve probably heard the term “sole proprietorship” tossed around. Many people just beginning their journey into business ownership chose this structure due to its simplicity, accessibility, and affordability. However, definitions and regulations can vary by state. 

How is a sole proprietorship defined in California? What steps can you take to launch one? At Top Hat Business Brokers, we commit ourselves to helping Sacramento business owners make informed decisions about structuring and running their businesses. Our consultants answer this and other questions below to help you navigate your next moves.

The Californian Definition of a Sole Proprietorship

In California, a sole proprietorship is an unincorporated business that is an extension of the business owner. Therefore, the government and connected agencies consider you and your business the same entity. (The opposite would be a business trust, which is a separate entity from the owner.) Sole proprietorships only consist of their owners and perhaps the owners’ spouses.  

The California government will recognize you as the sole proprietor of your brand. You make all decisions regarding the entity’s foundation, asset acquisition, and other pertinent shifts. However, you are also fully responsible for handling debts, breaches, and other obligations. 

This structure keeps you linked with your brand until death or business closure. You can also change the structure to meet your growing needs later. 

Pros and Cons of a Sole Proprietorship

Proprietorships are popular for myriad reasons. They offer a stable stepping stone for fresh business owners who need to gain their footing. However, they come with a unique set of challenges along with freedom and flexibility. Read below to gauge whether the benefits justify the obstacles. 

The Perks

What makes sole proprietorships so enticing? Once you make your business official with the state government, you’ll appreciate several perks, including:

  • Quick and easy setup: When you start your business, you’ll navigate a simple process. Many people who do contract work can claim sole proprietorship without taking any extra steps. You determine the level of work you will put into officializing your business. 
  • Affordable maintenance: Many business structures require fees to maintain licensure. However, sole proprietorships typically come with no added maintenance costs. It simply exists as long as you provide the brand’s aligned services and products; no business license is required by the state. 
  • Control over all profits: Some structures involve numerous owners, investors, and staff members, all of which require a cut of the profits. Business owners with sole proprietorships can rake in all the revenue if they choose. You choose where and how you use any income. 
  • Simple tax filing: Owners of more complex businesses must complete multiple tax forms, consult with accountants, and keep up with any tax law changes occurring within their state. As a sole proprietor, you only handle a single tax form that reports your business-related expenditures and earnings. While the filing process is a little more in-depth than W2s managed by employers, it still takes less time than other structure options. 
  • Calling all the shots: You answer to no one as long as you file your taxes correctly. You can work with business advisors and other professionals, but all final decisions ultimately rest with you. You’ll choose everything from the productivity software used to how you invest in your brand. 
  • Flexibility: A sole proprietorship meets you where you are. In other words, you can scale back when you have other responsibilities demanding your attention. Pick business management up later when you have more time and energy. 

The Downsides

What drawbacks could sole proprietorships possibly involve? Most of their limitations aren’t deal breakers for new business owners. However, you should know about them and their potential consequences to plan accordingly: 

  • Licensure: While California doesn’t require licenses for sole proprietorships, some municipalities do. Research whether your city or county requires licensure to ensure you abide by local laws. If you move to a new location, you’ll also subject your business to the new regulations in the area. 
  • Personal liability: One of the most daunting drawbacks of a sole proprietorship is the relationship between you and all financial matters related to the brand. Your complete authority comes with personal responsibility in handling debts and other issues. Since the state recognizes you and your business as the same, debt collectors can use personal assets like retirement funds and residential properties as collateral for outstanding debts. You cannot differentiate between business and personal assets. 
  • Self-employment tax: Remember how you control all profits? That also means the state and federal governments take no taxes out. Therefore, you must set aside funds to pay taxes directly out of your pocket. 
  • Quarterly tax filing: Additionally, you’ll complete tax forms four times each year rather than once. Consistent record-keeping to track expenditures and profits is a must to ensure you put back enough estimated taxes. 
  • Fewer funding options: Finally, sole proprietors often struggle to secure funding from investors or loan providers. If you need some financial assistance from an outside party, you might feel disappointed at the lack of opportunities available to you. 

Steps To Start Your Sole Proprietorship in California

If you think the benefits outweigh the pitfalls, you can begin your journey as a sole proprietor. The following steps will guide you through the process.

#1. Choose a Business Name

How will you identify your business? List a few options you like. Then, use a search engine to determine whether other businesses share your name. 

You should also check with the U.S. Patent and Trademark Office, the California Secretary of State, and associated agencies dealing with your municipality. Speak with a business attorney regarding the legality of choosing and using a brand name

#2. Draft and Publish a DBA Statement

Your DBA statement, also known as a fictitious business name statement, permits you to make business transactions. This record will enhance your marketing efforts and sales capabilities. Check with your county clerk to find out how to write it and which additional documents you may need to make your business legitimate. 

#3. Obtain an EIN

An employer identification number allows you to hire employees. If you are the only person working for the business, your social security number is your EIN. However, you might need an EIN as your brand grows and requires more talent to run it. 

#4. Acquire Any Certification Needed for Your Business

Although the state of California doesn’t require licensure for sole proprietors, many cities and counties do. The federal government might also mandate certification for distributing specific products or services. Check your local legislation and the standards within your industry. Rules and regulations may also be different for e-commerce businesses.

#5. Start a Business Bank Account

While sole proprietorships identify the business and its owner as the same entity, you should still start a business account. Keeping your personal and business expenditures and investments separate is the best practice. 

#6. Insure Your Business

You might need insurance if:

  • You provide services or other work that could result in an injury
  • You employ other people
  • You work on or use another party’s property at any time

Insurance could prevent significant debt from falling squarely on your shoulders. 

Kickstart Your Sole Proprietorship With Assistance From Top Hat Business Brokers

Are you establishing a sole proprietorship in California? Let Top Hat Business Brokers help you start your journey! Fill out a form for more information today.

More About Terry:

Buying or Selling a business can be a stressful and often confusing process. As a business broker, I bring years of valuable, personal experience to help you through the process. For my buyers and sellers, I provide professional valuations, confidential listings, automated buyer inquiry systems, and stay in touch throughout the entire process with regular check-ins. By keeping an eye on the goal, the successful transfer of a business, we will work together to make it happen as quickly and smoothly as possible.

 – Terry J. Watts

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