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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.
  • A married couple can be classified as a sole proprietorship
  • A business conducted by registered domestic partners must be classified as a partnership.

Learn more about Doing Business in California.

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 exists.
  • 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, Profit or Loss from Business. If you are required to complete federal Schedule C, then you must provide a copy of your federal return, including Schedule C. This form is included with your California personal income tax return (Form 540 or Form 540 NR for non-residents).
  • Non-resident individuals who have income from California sources through a sole proprietorship may need to use Schedule R to determine business income attributable to California. See CCR Section 17951-4 to determine if you need to apportion your business income to California.   
  • The return due date is normally April 15 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 as follows (See Instructions for California Form 540-ES):  
    • 30 percent for the first required installment due April 15.
    • 40 percent for the second required installment due June 15.
    • No estimated tax payment is required for the third installment due September 15.
    • 30 percent for the fourth required installment due January 15 of the following taxable year.
  • Individuals complete Form 540-ES, Estimated Tax for Individuals, to report their estimated taxes.
  • Generally, estimated tax payments are required if you expect to owe at least $500 ($250 if married/registered domestic partner 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:
    • 90 percent of the tax on your current tax return.
    • The tax listed on your prior year tax return including Alternative Minimum Tax. Prior year exception is eliminated if your adjusted gross income (AGI) is greater than $1 million ($500,000 if married/registered domestic partner filing separately.)

Withholding Requirements

  • Withholding is a prepayment of California state income tax. A sole proprietor is considered a withholding agent if they control, receive, have custody of, dispose of, or pay California source income. Get Small Business Withholding Tool (or PDF version).
  • A withholding agent is required to withhold from all payments or distributions of California source income made to a nonresident payee unless the withholding agent receives authorization from us for a waiver or a reduced withholding amount. Withholding is optional, at the discretion of the withholding agent, on the first $1500 in payments made during the calendar year.
  • If a sole proprietor is required to withhold and remit backup withholding to the Internal Revenue Service, the sole proprietor is also required to withhold and remit to the Franchise Tax Board, except for instances that are specifically excluded for California purposes.

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Last Updated: 03/13/2018

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