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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 $500 ($250 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.
  • For taxable years beginning on or after January 1, 2009, individuals are required to pay 30 percent of the estimated tax liability for the first and second required installments and 20 percent of the estimated tax liability for the third and fourth required installments. Prior to this law change, each installment was 25 percent of the total estimated tax due.