How to Establish a Sole Proprietorship in California
To establish a sole proprietorship in California, here's everything you need to know.
In California, you can establish a sole proprietorship without filing any legal documents with the California Secretary of State. There are four simple steps you should take:
1. Choose a business name.
2. File a Fictitious Business Name Statement with the county recorder.
3. Obtain licenses, permits, and zoning clearance.
4. Obtain an Employer Identification Number.
1. Choose a Business Name
In California, a company may use any name that is not the same as or too similar to another registered business. In addition, the name may not be misleading to the public. To make sure your business name is available, it is important to run a search in the following government databases:
- California Secretary of State: (Search both corporations and limited liability company categories.)
- U.S. Patent & Trademark Office: (Click on the TESS link under Tools.)
- The county recorder’s office where you plan to do business.
2. File a Fictitious Business Name Statement
If you use a business name that is different from your legal name, California requires you to file a Fictitious Business Name Statement in the county recorder’s office where the business is located. Check the California State Association of Counties for a list of county websites. Business owners have a 40-day grace period from the business start date to file this statement. The filing fee is $26. In order to complete the application process for registering a fictitious business name, the business owner must publish the statement in a well-known newspaper within the county for four consecutive weeks.
3. Obtain Licenses, Permits, and Zoning Clearance
Your business may need to obtain a variety of licenses and permits depending on its business activities. California provides a comprehensive database of every license and permit that may be required by any sole proprietorship. A business can obtain this information by going to the California Governor’s Office of Business and Economic Development CalGold website. Type in your county and city to get a list of all the required permits and licenses for your business activity as well as information about required filings and laws you may be subject to, such as minimum wage laws and inspections.
4. Obtain an Employer Identification Number
Sole proprietors who wish to have employees need to obtain an Employer Identification Number, or EIN. This is a nine digit number issued by the IRS for tax reporting purposes. All businesses with employees are required to report wages to the IRS using their EIN. Registering for an EIN can be done online at the IRS website.
Sole proprietors without employees are not required to have an EIN because they can use their Social Security number to report taxes. Nevertheless, you may want to obtain one anyway for your business. Some banks require one to open a bank account and it can reduce the risk of identity theft.
In California, businesses that pay at least $100 to employees in a given quarter are also required to register for a California employer account number. You can register online at the California Employment Development Department (EDD) website.
If you have employees, you must report and pay employment taxes quarterly. For more information on being a California employer, see the California Employer’s Guide, available on the State of California Employment Development Department (EDD) website.
It is important to consider doing the following once you have established your sole proprietorship:
- Open a business bank account. Using your fictitious business name and EIN, you should set up a bank account to keep your business and personal finances separate.
- Obtain general liability insurance. Because sole proprietors are personally liable for all debts and obligations of the business, a business liability insurance policy may be the only form of financial protection against unforeseen events.
- Report and pay taxes. Depending on your specific business activities, you may be required to report such items as sales tax and use tax. The California State Board of Equalization oversees and collects these taxes. Visit their website for more information.
For information on other California business entities, see Nolo's section on Starting a Business in California.