You might have some state or federal filing requirements when starting your sole proprietorship, depending on the nature of business and whether you'll have employees. Forming a sole proprietorship is usually less complex than forming other business types, such as a limited liability company, and you won't have to register with the California Secretary of State.
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Your desired sole proprietorship name might be in use by another California business. Using a name that another business already uses will cause confusion for your customers. Before committing to a name, you'll need to check the names of businesses registered with the California Secretary of State's office. Although sole proprietorships don't register business names with the office, other business types—LLCs and corporations, for example—do register names. The California Secretary of State's office doesn't have online lookup available at the time of publication. You may request a free name check by filing out the "Name Availability Inquiry Letter" form, available on the office's official website, and mailing it to the office.
If your business is going to have employees, you must register with the IRS for tax withholding purposes. Apply to the IRS for an Employment Identification Number. This unique number, assigned to your sole proprietorship by the IRS after you apply, identifies your business to the IRS. You may use your EIN for your business licenses, bank accounts and other business items that require your Social Security number. You may apply for an EIN at the official website of the IRS free of charge. You might be subject to special tax reporting or have to make quarterly tax payments to the IRS, depending on your business volume and number of employees. Contact a tax attorney if you're unsure about tax requirements for your business.
State Taxes and Workers' Compensation
Any employer in California who is paying employees more than $99 over a period of four months must register with the California Employment Development Department for unemployment tax purposes. You have to report new employees to the department's new hire registry within 20 days of their first day of work. Both requirements can be completed online on the EDD's official website. You need to carry worker's compensation insurance for employees besides yourself. The California Division of Workers' Compensation handles the program, and you may buy coverage through an insurer licensed in California. Coverage prices vary, depending on the number of employees, the wages you pay and the type of work conducted.
You might need a license for your sole proprietorship, depending on what type of business you're doing. California requires special licenses for various business transactions and types. For example, a mattress seller needs a license from the California Bureau of Home Furnishings & Thermal Insulation. A person selling or serving liquor must have a license from the state Department of Alcoholic Beverage Control. If you're not sure whether you need a business license, check with the California Department of Consumer Affairs or speak to a business attorney. Requirements and fees for a business license vary by license type. Opening a separate bank account for your business helps you keep business money separate from your personal funds. You need to give the bank your EIN or Social Security number, and you may need a business license or other proof of your business. However, if your sole proprietorship's name includes your last name, you might not need proof of your business, according to the Citizen Media Law Project.
References & Resources
- Citizen Media Law Project: Becoming a Sole Proprietor in California
- IRS: Apply for an Employer Identification Number (EIN) Online
- Citizen Media Law Project: Sole Proprietor
- California Secretary of State: Checking Name Availability
- Division of Worker's Compensation: Employer Fact Sheet
- California Department of Consumer Affairs: Licensee Information
- California Department of Consumer Affairs: Furnishings, Home
- California Department of Alcoholic Beverage Control: Licensing
- California Secretary of State: Name Availability Inquiry Letter
- California Employment Development Department: Payroll Tax Account Registration
- California Employment Development Department: eServices for Businesses
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