Franchise Tax Board

Sole Proprietorship

This is the simplest and most common form of starting a new business. It has no existence apart from its owner. A sole proprietorship consists of only "one" individual; ownership by more than one person creates a partnership. (Note: A husband and wife can be classified as a sole proprietorship.)

Key Features

  • The cost to start a sole proprietorship is inexpensive.
  • A separate bank account should be established to run the operations.
  • The owner of the sole proprietorship controls all facets of the business.
  • The business and the owner are one. There is no separate legal entity and thus no separate legal person.
  • The sole proprietor is personally liable for all debts and actions of the company.
  • The life of the business continues to exist as long as the business owner is alive. Once the owner dies, the sole proprietorship no longer exits.
  • Purchasing insurance to cover the risks of running your business is advisable. Consider consulting an insurance specialist on the matter.

Filing Guidelines

  • Report your business income and expenses on Federal Form Schedule C. This form is included with your California personal income tax return (CA Form 540).
  • The return due date is normally April 15th for calendar year taxpayers.
  • The tax rate depends on the proprietor’s total taxable income.

Estimated Tax

  • A sole proprietorship will include all sources of income (e.g., wage income, investment income) when determining estimated tax payments.
  • Installments are due and payable on April 15th, June 15th, September 15th of the taxable year and January 15th of the following taxable year.
  • Individuals complete Form 540-ES to report their estimated taxes.
  • Generally, estimated tax payments are required if you expect to owe at least $200 ($100 if married filing separately) in taxes for the current year (after subtracting withholding and credits) and you expect your withholding and credits to be less than the smaller of:
    1. 90 percent of the tax on your current tax return or
    2. The tax listed on your prior year tax return including Alternative Minimum Tax.