Sole proprietorship Business type
A sole proprietor is the most common type of new business.
Some key features of a sole proprietorship are:
- The business owners income is claimed on their individual income tax return (Form 540)
- As a sole proprietor you are personally liable for all debts and actions of the business
- An individual taxpayer can start a sole proprietorship
- A married couple can report the activity of the sole proprietorship on the individual income tax return
- Filing jointly: A single return is required
- Filing separately: The income needs to be allocated between the 2 spouses based on community and separate property rules.
- A business conducted by registered domestic partners (RDP) must operate as a partnership
- You can establish a sole proprietorship without registering with the California Secretary of State
- Your business remains active until it’s dissolved or upon your death
Set up a sole proprietorship
If you’re a sole proprietor, you run your own business as an individual and are self-employed.
To establish a sole proprietorship, you must:
- Choose a business name, for tax purposes, even if it’s your name
- Obtain licenses, permits, and zoning clearance
- Visit CalGold for more information
- File a fictitious business name statement with the county recorder
- Obtain an Employer Identification Number
- Visit the Employment Development Department for more information
A sole proprietorship operates as an individual for tax purposes. This requires the individual to report all business income or losses on their individual income tax return (Form 540).
Part-year and nonresidents
For part-year residents or nonresidents, California source income includes, but is not limited to:
- 1099 income
- Income or loss that flows through from pass-through entities (CA K-1)
- Income from intangibles and services
A nonresident operating a sole proprietorship with California source income must file California Nonresident or Part-Year Resident Income Tax Return (Form 540NR).
How to report
- Report your business income and expenses on the Profit or Loss from Business (IRS Form 1040 Schedule C).
- Nonresident individuals with income or loss inside and outside California, use Schedule R to determine your California source income.
- Pay your estimated taxes on the Estimated Tax for Individuals (Form 540-ES).
- For information on estimated payments, go to our Estimated tax payments page.
Apportionment and allocation
A trade or business with income within and outside of California may be subject to California apportionment and allocation rules. Visit apportionment and allocation for more information.