How Do You Setup a Sole Proprietorship in CA?

A glass shop door with an open sign, symbolic of setting up a sole proprietorship in CA.

Everything You Need to Know About Setting Up a CA Sole Prop in 5 Simple Steps

Before starting a new business in California, you first need to decide what type of business entity you want to form. In general, a Sole Proprietorship is easy to establish in CA. In fact, you don’t even need to register with the California Secretary of State to set it up.

Be aware though. Sole Proprietorships are risky. This type of business does not provide the owner with any protection against business liabilities. This means that you will be personally liable for all of your business’s debts.

Here are the five simple steps you should take to start a Sole Proprietorship in California.

Step 1: Choose a Name for Your CA Sole Prop

In California, you can choose any name for your Sole Proprietorship as long as it is not the same or similar to an already registered business name, providing it isn’t misleading to the public. For example, you cannot choose a business name that contains the word government. To check the availability of a name, check the California Secretary of State website.

That having been said, the default name of a Sole Prop is the legal name of the owner. In most cases, however, business owners choose to use a different business name. (Obviously a good business name can help your customers understand the type of product or service your Sole Prop provides.) In order to change the name you need to file a dba. How do you do it? Read number 2.

Step 2: File a Fictitious Business Name Statement

This process is also called filing for a DBA or “doing business as”. The owner of a Sole Proprietorship must file for a DBA if they do not intend on using their surname. In California, you can file a Fictitious Business Name Statement in the county recorder’s office where your business is located.  

The filing fees are $26. From the start date of your business, you will have 40 days to file a DBA statement. To complete the process, you must follow the county’s requirements for publicizing your new business name. This often involves a predetermined list of local papers where you have to publish the information. Just ask the clerk for some info on this and they’ll provide it.

A street sign of California Ave with palm trees in the background, symbolic of starting a sole prop business in California.
How do you setup a sole proprietorship in CA? Simple, just keep reading and you’ll know.

Step 3: Obtain Required Licenses, Permits, and Zoning Clearance

This step depends on the nature of your Sole Proprietorship. Some businesses need to obtain one or more licenses or permits from the state. Fortunately, California provides a comprehensive database of every license and permit required for any kind of Sole Prop. This will guide you through the process and help you better understand the required documents for your Sole Proprietorship.

Just visit the California Governor’s Office of Business and Economic Development CalGold website. Type in your county and city and you will get a list of all the required permits and licenses for your business activity. You will also find useful information that will help you file and obtain these documents.

Step 4: Obtain an Employee Identification Number (If Necessary)

As a Sole Proprietorship owner, you will not automatically need an Employer Identification Number (EIN). However, under certain circumstances, you might need to obtain one. For example, if you want to hire employees, you’ll need to have an EIN.

You might also need this nine-digit number for tax reporting purposes or to open a bank account. Check with the tax authorities in California to learn if your Sole Proprietorship is required to take this step. Registering for an EIN is done through the IRS. This process can be completed online at the IRS website.

Step 5: Do the Things Any New Business Owner Should Do

Anyone starting a new business, regardless of if it is a sole prop or something else, should consider setting up a bank account, obtaining any necessary insurance, and potentially setting up a business credit card and or line of credit. These are basic for most businesses regardless of the type of entity or industry.

That’s it! Now, you’re ready to start your new business and will never ask yourself how do you setup a sole proprietorship in CA again! (Although if you do you can just come back and reread this article…) Want to learn even more about setting up a business in California? Check out this awesome blog post which breaks down everything you need to know about starting a business in CA, including the difference between all of the business types (Sole prop, LLC, etc.)

Starting a new business in California? We’ve got your back! You can count on My OC Bookkeeper for the best bookkeeping and business strategy services in Orange County. Reach out to us now and let’s do great things together!

Want to learn everything you could want to know about starting a business in CA? Watch the video below. It’s great, trust us we know, we made it. (We’re not biased, it really is great.)

Taxes in CA – Everything You Need to Know

A pile of papers and tax forms, symbolic of the tax considerations for businesses in CA.

Starting a new business in CA is exciting.  There’s the initial ideation and snagging your first client.  There’s the first deposit that hits your bank account and the first time you realize your income is covering your expenses.

What’s less exciting is dealing with taxes. Unfortunately (or fortunately perhaps) that is something that every business has to deal with, and not understanding the tax environment can cause your business all kinds of problems. So read on to learn everything you need to know about taxes in CA. We promise it won’t hurt too much.

California Minimum Tax

If you are a corporation or an LLC operating in the state of California, you’ll be subject to the annual state minimum tax of $800. Even entities that are registered in a different state but operate within California are also subject to this minimum tax. 

For new businesses formed in 2021 and 2022, there is a waiver in place for the minimum tax in effect for the first year the entity is in business.  However, if you are a corporation and your actual tax is higher than the minimum tax, you’ll still be required to pay the tax.

California LLC Fee

This California LLC surprises a lot of LLC owners.  There’s a fee-based solely on your revenue figure, regardless of your net income.  The fees range from $0 – $11,790 based on your annual revenue.  This one can be challenging because expanding revenue does not always coincide with expanding profit.

If your business operates on a calendar year, you must prepay your estimated LLC fee each year by June 15th with the remainder due by the following April 15th. 

Secretary of State Fee & Statement of Information

It’s worth mentioning that the California Secretary of State requires the regular filing of a Statement of Information with the state.  For corporations, the statement is due within 90 days of registering your corporation and then annually for the life of your corporation.  For LLCs, the statement is required within 90 days of setting up the business and then every other year thereafter. 

The filing can be completed online and usually takes less than 10 minutes to complete, and the fee is under $50 but varies by entity type and year.  Though the Secretary of State sends out reminder postcards, if you overlook the filing, you will get a notice 1-2 years later with a penalty of $250 that cannot be waived.  Additionally, each entity has its own due date based on when the entity originally registered making it easy to overlook.

A line of palm trees at sunset, symbolic of doing business in CA and the tax considerations associated with that.
CA is a beautiful place and with a thriving business community (and palm trees) – but there are some important things you should know about taxes in CA, so read on.

Difference Between Federal and California Depreciation

California adheres to many of the federal tax rules, but not all of them.  The federal depreciation rules are a notable exception.  In recent years, the federal government has allowed taxpayers to claim bonus depreciation of 50-100% depending on the size of the business, type of asset, and year.  California has not adopted the bonus depreciation rules which means that you may have significant mismatches between your federal and California deductions.

One of the most notable implications is on new vehicle purchases.  For example, in 2021, businesses were allowed to claim up to $18,200 for standard passenger vehicles whereas California limited the first-year deduction to $3,670. 

In later years, the depreciation on a vehicle in California may exceed the federal allowed amount, this mismatch can make tax planning more difficult.

Real Estate Withholding Tax

If you’re selling property in California, whether it’s your own home or an investment property, California will want you to withhold state tax from escrow.  This often comes as a shock to homeowners and investors.  While you can avoid withholding if you do not have any taxable gain, you will have to certify the lack of gain to the state. 

Form 593 walks you through the calculation of the gain on sale and requires different withholding depending on the type of entity (or individual) that owns the property. 

Capital Gains

California doesn’t differentiate between long term and short terms capital gains, and it also doesn’t have different tax rates for qualified dividends.  In California, for anything included in your taxable income, then it’s taxed at the same rate.  This is true for both individuals and corporations. 

For people used to the federal favorable tax treatment of certain types of income, this can come as a shock at tax time.

The Good News About Taxes in CA – Pass Through Entity Tax (PTET)

Though most of the items above are either bad news or pitfalls to watch out for, there is good news for business owners in the golden state.  For 2021-2026, the years in which there is a state and local tax (SALT) deduction cap on individual tax returns, the state of California has created a pass-through entity tax (PTET) that allows business owners to pay a business tax and get a dollar-for-dollar credit on their individual tax returns. 

Because business taxes are allowed as a deduction under federal law, paying this tax through your business effectively negates the SALT cap on your individual return and makes the tax paid through your entity fully deductible. 

It’s not that simple though.  There are strict rules on who can participate (sole proprietorships and single-member LLCs are out of luck) and if you elect to participate you must pay 9.3% of your business’s taxable income to the state of California – you don’t get to decide how much of your profit is paid in for taxes. However, each owner of the business has the option to opt-in independently.

With all of These CA Taxes, Is It Still Worth Doing Business Here?

Of course! While California has its fair share of regulations and taxes, it also has a thriving business environment that has been creating awesome businesses for years. (It also happens to be a great place to live.) Just remember to be careful about satisfying your business’s regulatory and tax requirements so you don’t end up hurting yourself in the long run.

If you want to dive even deeper and learn everything you could ever want to know about starting a business in CA, check out this great article on the subject. Or, if you want to go direct to the source, familiarize yourself with the CA Secretary of State website, there is all kinds of important info there. And, for even more great info on doing business in the great state of CA check out our post on the best way to deduct vehicle expenses in CA, or how to setup an LLC in CA.

Need some help with anything that has to do with taxes in CA? Reach out to My OC Bookkeeper. We are California’s premier bookkeeping, accounting, outsourced CFO, and business advisory firm and help businesses all over California.

Want to learn everything you need to know about starting a business in CA? Check out the great video below.

Our Latest Blog Posts