As a new business owner, one of your most important decisions is determining the form of business ownership that best meets your business needs. Selecting a structure for your business should be a carefully planned process with a qualified professional such as a registered agent, certified public accountant, or attorney who specializes in the matter. Also, as your business grows, you may want to consider whether you need to adopt a new form of business ownership to achieve better results. Although there are many forms of business ownership to choose from, in this guide we highlight the most common.
Business as a sole proprietor
This is the simplest and most common way to start a new business. Sole proprietorship businesses are established to allow individuals to independently own and operate a business. The sole proprietor has full control, receives all profits, and is responsible for business taxes and obligations.
Key characteristics of the business as a sole proprietor
- It is inexpensive to start a business as a sole proprietor.
- The sole proprietorship consists of a single individual or a married couple. (Business ownership by one or more individuals or by a registered domestic partner creates a partnership.)
- The business and the owner are one. There is no separate legal entity.
- The business owner as a sole proprietor controls the entire business.
- The sole proprietor is personally liable for all debts and acts of the business. Personal assets could be used to pay business debts.
- The duration of the sole proprietorship continues to exist until the business closes or for as long as the owner is alive. When the owner dies, the sole proprietorship ceases to exist.
How to start a business as a sole proprietor
- A bank account should be establish for your business.
- Depending on the type and needs of your business, a risk assessment may be require. Consult with an insurance professional and your attorney to determine if you need or are advise to obtain liability insurance.
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Most cities and counties require businesses to obtain a business license, various permits, and/or register to do business within their city or county limits. If you are doing business in multiple cities or counties, you may be required to obtain multiple licenses. For specific rules and regulations, contact directly the business licensing department of the city and/or county where your business will be primarily located. Governor’s Cal Gold online database at calgold.ca.gov, Governor’s Office of Business and Economic Development (GO-Biz) ) at business.ca.gov, and the California Business Portal at businessportal.ca.gov, provide links and contact information for agencies that administer and issue business licenses, permits and registration requirements of all levels of government.
- Contact your local Chamber of Commerce or call the statewide Chamber of Commerce at 800-331-8877 for information about your area and referrals to other agencies.
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Small Business Development Centers (SBDCs) provide assistance to small businesses throughout the United States and its territories. SBDCs help entrepreneurs realize the dream of owning their own business. And help existing businesses remain competitive in an ever-changing and complex global marketplace. SBDCs are sponsored by leading universities and state economic development agencies and are funded, in part, through a partnership with the SBA. For more information on SBDCs visit SBA.gov.
- If required, register a fictitious name, also known as “Doing Business As” or DBA. Please refer to Appendix 1 of this booklet for more information.
- Filing of incorporation documents with the Secretary of State is not required.
Guidelines for Filing Business Tax Returns as a Sole Proprietor:
- Use federal Schedule C, Profit or Loss from Business to report profits and losses from your business.
- If you operated more than one business under sole proprietorship status, use a separate Schedule C for each business.
- Report the net gain or loss from Schedule C on your California personal income tax return, Form 540, California Resident Income Tax Return, or Form 540NR, California Nonresident or Part-Year Resident Income Tax Return.
- Include a complete copy of your federal income tax return, including Schedule C, with your California personal income tax return.
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There is no requirement to file a separate tax return for the business. The due date for the federal tax return (including Schedule C) is the same as the due date for your California personal income tax return (with a copy of your federal return and Schedule C), which is typically the April 15.
- The tax rate on the return depends on the tax rate on your individual income.
Estimated tax
- California taxes use pay-as-you-go (periodic payments).
- Estimated tax installment payments for individuals are due and payable on April 15, June 15, September 15 of the tax year, and January 15 of the following tax year.
- Individuals complete Form 540-ES, Estimated Tax for Individuals to report their estimated taxes.
- The sole proprietorship business will include all sources of business income and personal income such as wages and investment income when determining estimated tax payments.
- Generally, you must make estimated tax payments if you expect to owe at least $500 ($250 if married filing separately) in tax for the current year (after subtracting withholdings and credits). and you expect your withholdings and credits to be less than the lesser of the following amounts (90 percent of the tax that appears on your tax return for the current year , either 100 percent of the tax that appears on your prior year tax return including the Alternative Minimum Tax)
How to end a business as a sole proprietor
- File a federal Schedule C with your federal tax return and file a California tax return, with copies of your federal return and Schedule C, for the year you go out of business, or for the year the sole proprietor dies.
- File tax returns for any of the delinquent tax years.
- Pay all outstanding tax obligations and penalties.
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Notify all creditors, vendors, suppliers, customers, and employees of your intent to close the business. If the sole proprietorship is terminate by the death of the sole proprietor. Creditors may be entitle to additional notice in the event of a trust or probate administrative proceeding. Consult with a probate attorney if necessary.
- Close business checking accounts and credit cards.
- Cancel any type of licenses, permits and fictitious business names.
- Consider publishing a statement in a local newspaper of general circulation near the main location of your business. That you are no longer doing business.
