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.
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.
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.)
The My OC Bookkeeper Guide to Setting Up a Business in Orange County, CA
Ready to start a business in Orange County, CA? There are a lot of things to think about, but don’t worry we are here to help. My OC Bookkeeper (Orange County’s best bookkeeping and accounting firm) has put together this guide to help you on your way. In addition to some great info, we’ve included links to websites that will be valuable throughout the process. So, without further ado, My OC Bookkeeper’s guide to setting up a business in Orange County, CA. (By the way, if you aren’t located in Orange County don’t worry, these tips will be helpful wherever you are.)
Step 1: What Kind of Business Should I Set Up?
There are seven basic types of businesses you can set up. The types are: sole proprietorship, corporation, limited liability company (LLC), limited partnership (LP), general partnership (GP), and limited liability partnership (LLP). We will describe each one in turn.
Sole Proprietorship – a sole proprietorship, or sole prop, is generally considered the easiest and cheapest form of business to form. It enables an individual (rather than an ownership group) to setup and own a business. Importantly, with a sole prop the owner and the business are considered a single entity, so the owner is responsible for all of the obligations and liabilities of the business. They have complete control, and individually take the profits and pay the taxes. If the business is to have a name different than their own, i.e. Steve Baker, then a fictitious business name, or dba, must be filed with the county where the business operates. There are no specific documents that must be filled with the CA Secretary of State, although depending on the type of business there may be paperwork and registrations required.
Corporation – a corporation is a usually a legal entity that is entirely distinct from its ownership. The structure prevents liability from passing from the business to the owners; however taxes are paid by both the company itself and the shareholders. Unlike most business entities, corporations can sell stocks and bonds to raise capital, and the company can survive long after the initial owners have passed away.
Limited Liability Company (LLC) – like a corporation, a limited liability company provides ownership protection from liabilities associated with the business. (For example, if someone sues the business, the owner’s assets are not at risk, only the business assets are.) An LLC is generally cheaper and easier to set up than a corporation, but more expensive than a sole proprietorship. To do so requires filing Articles of Organization (Form LLC-1) with the State of CA. You must also complete an operating agreement describing the affairs and activities of the business and keep it at your office. (You don’t have to file it with the state.) It costs $800 a year to maintain an LLC in California.
Limited Partnership (LP) – a limited partnership must have at least one general partner and one limited partner. The general partner acts as the controlling partner and is personally liable for all of the business’s liabilities. The limited partner has a certain amount of protection from the liabilities of the company depending on their level of participation. (Definitely talk to a lawyer before setting up an LP.) In CA, you will need to file a Certificate of Limited Partnership (Form LP-1) with the Secretary of State to set up an LP.
General Partnership (GP) – to form a GP in CA you must have two or more people who own the business. Generally speaking, all of the partners are jointly liable for the debts of the business, although the details in this regard may change depending on the nature of a given claim and the desires of the claimant. Profits are taxed as personal income of the owners. (Like with an LP and Corporation, it is best talking to a lawyer before setting up a GP.) To register a GP in CA, you will need to file a Statement of Partnership Authority (Form GP-1) with the CA Secretary of State; however some GPs don’t register at the state level at all.
Limited Liability Partnership (LLP) – LLPs are partnerships that work in specific industries such as public accounting, architecture, engineering, law, and land surveying, or that provide services to a CA registered LLP that practices public accountancy or law, or to a foreign LLP. LLPs are required by law to maintain certain minimum levels of insurance. To register an LLP in CA you must file an Application to File a Limited Liability Partnership (Form LLP-1) with the CA Secretary of State.
Step 2: Is The Name I Want for My Business Available?
A couple of other things to keep in mind (more detail is available on the Secretary of State website noted above):
A name for a corporation can be used if it isn’t the same as or too similar to an existing name recorded with the California Secretary of State or if the name is not misleading to the public.
A name for a limited liability company can be used if it is unique on the records of the California Secretary of State or if the name is not misleading to the public.
A name for a limited partnership may be adopted if it is unique on the records of the California Secretary of State.
Step 3: Obtain a Federal Employer Identification Number (FEIN or EIN)
An EIN (federal employer identification number) is used by the federal government when taxing businesses and is basically the business version of a social security number. Corporations, limited liabilities companies, and partnerships need EINs. Sole proprietorships may not need one, depending on the type of business they are engaging in. To find out if you need EIN, start with the IRS webpage entitled: Do I Need an EIN?
Even if you don’t technically need one you may want to get one anyway. Why? Using an EIN instead of your social security may protect you from identity theft. If you work as an independent contractor you may have to provide either your social security number or EIN to your clients, and the more people that know your social security number the greater the risk of fraud. Having an EIN also indicates to clients that you are an independent businessperson rather than an employee, which they may prefer, and also may be required to set up a business bank account. (Which you likely will want to do.)
Getting an EIN is fast, easy, and free. Just use IRS EIN Assistant. In order to complete the process you will need the following information:
The mailing address and street address associated with the business.
The legal name of the business or individual, and the trade name, if you have one.
If the business is a corporation, the state or country where it was incorporated.
The type of business you are forming.
The main activities the business will engage in.
The reason you are applying.
The social security number of the ‘responsible party’. (If the responsible party is also a business entity than its EIN will be used.)
If the business is an LLC, the number of members.
The date the business was started or acquired.
The date when wages were paid the first time. (If there have been any wages.)
The greatest amount of employees you anticipate having over the next twelve months.
Step 4: Apply for the Relevant Permits and Registrations
Depending on the type of business you will be engaging in and where you are located you may need a wide variety of permits and/or registrations. A great place to start is CalGold, with the CA Governor’s Office of Business and Economic Development. After that be sure to check with your county and city governments to make sure you aren’t missing anything.
Step 5: Setup Applicable Bank and Credit Card Accounts
Setting up a bank account and credit cards used solely by your business can help to keep your business and personal finance separate. (This is true whether you are setting up a business in Orange County or anywhere else!) This can make it easier to track your business activities which will help you to stay organized, facilitate strategic decision making, and make things a lot easier come tax time. (Having a good bookkeeper – like My OC Bookkeeper can help a lot with these things too. Give us a call!) The accounts can also help you to establish a credit history for your business, which can be helpful if you ever want to set up lines of credit or qualify for business loans.
Opening the accounts often requires an EIN, copies of your business licenses, and a document signed by the business owners saying that you are authorized to open them. The U.S. Small Business Administration has some great information on specific things you are likely to need depending on the type of business structure you have.
Step 6: Satisfy Ongoing Requirements of Business Ownership
After successfully setting up your business there are some important things to remember:
If you setup a fictitious business name, i.e. dba, you will have to renew it every five years.
Corporations and LLCs in CA have to pay at least $800 in franchise tax every year. Learn more about this from the CA Franchise Tax Board.
California Chamber of Commerce – a nonprofit advocate for CA businesses. You can find wide ranging resources ranging from updates on business related legislation to compliance tips to information on human resources, among other things.
IRS – The internal revenue service. Take a look for info on federal taxes.