Do you want to start a business or grow an existing one in the United States, even though you’re a non-resident? Well, California might be just what you need!
California is known as the “Golden State” and is a great place for small businesses. In fact, it is second in the world for sole proprietorship businesses, and the best part is that starting one is so simple and affordable!
Forming your small business there can lead your business to sky-high success in innovation, whether you are a resident or a non-resident. However, as a non-resident sole proprietor, you should have sufficient knowledge about the required permits and licenses to run the business legally, even though there is no need to register with the state.
This blog will explain how to start a sole proprietorship in California. Let’s explore!
What Is a Sole Proprietorship?
“Sole” means lone or single. A sole proprietorship has a single owner and operator accountable for all debts, losses, and liabilities. Sole proprietorship businesses are usually one of the most popular business structures for beginners. You will have total supervision and responsibility for any debt, loss, or profit in this business structure.
As a sole proprietor, it is necessary to pay personal income tax on profits from the business. A sole business owner enjoys full control over and profits from the business. As it doesn’t require filing federal or state forms, a sole proprietorship has existed since the start of your business. When you launch a business as an individual without forming an LLC, corporation, or partnership, you are a sole proprietor.
Why Would You Start Sole Proprietorship in California?
Do you know that a sole proprietorship is a low-maintenance, unincorporated entity? Because there’s no upfront paperwork required.
For example, if you start taking freelance contracts, the designation of sole proprietor is automatic. Even if you start a grocery shop, it’s called a sole proprietorship. There’s no formal setup process like filing forms or paying fees for them.
California is a dream state for every businessperson planning to establish or expand their business concept or idea in the United States or globally. The state’s $3.1 trillion economy and 14% share of the U.S. economy make it one of the best places in California to establish a sole proprietorship. Though there are different kinds of business entities that you can launch in California, sole proprietorships are one of the most popular business forms for startups.
A California sole proprietorship isn’t considered a separate business entity like a professional corporation. Rather, it’s considered an extension of a single owner. Establishing this type of business entity is inexpensive and easy, with fewer regulatory requirements. You might obtain business licenses and permits depending on your locality or industry requirements.
Registration of Sole Proprietorship California for Non-Residents
Once you launch a business, you spontaneously become a sole proprietor in California and earn business income without filing any legal documents with the California Secretary of State government. Isn’t this exciting for non-residents like us?
Though no special action is required to create a sole proprietorship legally, you might check with the government’s tax offices to determine if you need a business license or special tax ID to operate a business.
You might also complete these five simple steps to register a business in California:
- Choosing a Business Name: You must have a unique business name that’s not exactly the same as, or even too similar or hasn’t already been claimed by another business in the same state. You must be assured that the name is available in California once you choose it. You can look up the U.S. Patent and Trademark Office, and Recorder’s office to learn whether another company in the state uses your desired business name.
- File a Fictitious Business Name Statement With the U.S. (DBA): You should know there are two types of names you can opt for a sole proprietorship. One is the owner’s name, and another is Doing Business As (DBA) or filing a Fictitious Business Name.
If you want to do sole proprietorship under any name without using your own legal name. You can file a fictitious name statement with the recorder’s office in the state of California, where your business will be located. This will help you sign contracts, receive money in the business’s name, and establish a more professional presence with customers or clients. - Apply For Sole Proprietor Business License, Permits, And Zoning Clearance: As the sole proprietors are personally liable and responsible for all debts, regulations, and obligations of the business, they should obtain one or more business permits and licenses, depending on the type of business. For example, if you do business selling alcohol, you might obtain a license from the California Department of Alcoholic Beverage Control.
If you are not running a home-based business in California, you may need to get a rental permit from the city or county where you will be doing business. To get an occupancy permit, a government inspector must check that your business follows all the rules and accepts the premises. - Obtain an EIN or Employer Identification Number: If you are concerned about taxes, a sole proprietorship is considered a pass-through entity. You may ask now what the point of getting EIN is.
Okay, I must tell you that you need to get an EIN if you start a sole proprietorship in California with employees, file pension plans, or exercise tax returns. However, if the case is different, you won’t need to obtain an EIN or Employer Identification Number if you are a resident. Rather, you can use your Social Security number or SSN to file taxes instead. - Consult with an Expert Legal Consultant: Assigning a small business consultancy is important to start a sole proprietorship in California. You may need to file forms at the state and city levels and follow different rules and regulations. As a sole proprietor, it’s important to understand which steps you might take to start and operate your business legally. So, you should consult with a legal business expert like Business Globalizer or an attorney.
Even non-residents must have business experience and meet a few criteria to run a business in California. We can help you choose a business name to maintain your business.
How Do You Start a Sole Proprietorship in California Online from Abroad?
Starting a sole proprietorship online is a smart idea if you want to do business abroad, providing services like consulting, writing, design, or marketing. It’s best for businesses without employees or contractors, though you can still hire either as a sole proprietor.
If you’re a non-resident who runs a sole proprietorship in California and earns income from the state’s sources. You’ll need to obey any applicable business laws and regulations in California, and you may need to file any necessary licenses and permits to operate your business.
- You must file the California Non-resident Income Tax Return (Form 540NR).
- You should list your business’s earnings and outgoings based on Profit or Loss to IRS Form 1040 Schedule C. Use Schedule R to calculate your non-resident source income for income or losses inside and outside California.
- Also, you have to fill out Form 540-ES, Estimated Tax for Individuals, to submit your estimated taxes. You can also work online with a professional service provider to handle the formation process of a sole proprietorship on your behalf. Business Globalizer can be a great solution for forming a non-resident company in the USA.
Benefits of Registering a Sole Proprietorship in California
Starting a sole proprietorship in California can be a great way to expand your business. California provides countless benefits, including taxes, to non-resident business owners, such as,
- Cost of Formation: One of the main benefits of starting a sole proprietorship in California is that the overall cost of forming this business structure is lower than any other business.
- Pass-Through Entity: Another key benefit is that you don’t have to pay taxes on your business’s income, as a sole proprietorship is a pass-through entity. Rather, you can pay taxes on the income at your personal tax rate.
- Signing Contracts: As a sole proprietor, you can sign contracts using your personal name, and also your customers can write checks to the business using the same name.
- Tax Return: There’s no distinction between the owner and the business itself; sole proprietors don’t need to file business tax returns. Rather, they can simply claim any business profits or losses on their personal tax returns.
- Flexibility in Control: As no partner or shareholder in a sole proprietorship exists, you will have total control over your business. You can make decisions on your own. This will help you grow your business.
How Are Sole Proprietors Taxed in California?
Business taxation is one of the important aspects to consider when filing a sole proprietorship in California. You would be glad to know that the entire taxation process is very simple, as you and your business are considered a single business entity by the Internal Revenue Service (IRS).
Taxes are a part of the personal tax return for each sole proprietor. Your California business’s earnings and outgoings will be calculated and reported based on profit and loss, the costs of the home-based business, and the costs of goods sold. All will be reported by filling out IRS Form 1040 Schedule C. The rest of the calculation is that the net income will be counted as taxable business income.
Though California has the highest marginal income in the U.S., you don’t have to pay any additional taxes as an individual taxpayer.
If you are self-employed, there are extra taxes that you must pay. These taxes include Social Security and Medicare taxes, based on your business’s income. If your business doesn’t make a profit, you won’t have to pay these taxes, but you won’t receive the benefit credits for that year.
Some Disadvantages of Sole Proprietorship in California?
Before forming your sole proprietorship in California, you should know some disadvantages or drawbacks. These are:
- Personal Liability: If you file a sole proprietorship in California, you must pay for all the debts incurred by the business and take responsibility for all the losses and lawsuits against the business. If your business is sued once, creditors can pursue your personal property.
- Tax Disadvantages: One of the significant disadvantages is that you may miss out on other advantages under different business structures. Additionally, there might be additional property taxes and employment taxes related to the building you operate from.
- Dissolution: Another disadvantage is that a sole proprietorship business will remain active until you dissolve this or upon death.
FAQs
Q1: Does a sole proprietor need a business license in California?
Answer: No, it doesn’t require a statewide license in California for business operations. But depending on your business activity or business type and the requirements of the state or city, you may need to obtain permits or licenses.
Q2: How much does it cost to register a sole proprietorship?
Answer: There are no fees needed to register a sole proprietorship in the state. But depending on your business type and locality, you may need to pay some fees for business formation services if required.
Q3: Can a sole proprietor hire employees in California?
Answer: Yes. You can hire employees for your sole proprietorship business.
Q4: Does a sole proprietor need a separate bank account in California?
Answer: No, sole proprietors have no legal requirement to have a separate bank account. But we highly suggest you not use your personal bank account for business. Therefore, you can open a separate business bank account.
Q5: Do nonresidents need to visit California to register their sole proprietorships?
Answer: No, you don’t have to visit California to establish your business. You can establish a sole proprietorship business online with the help of legal business experts.
Final Thoughts
After exploring all the advantages and formation processes, we hope you have all the answers you sought. Now, you can decide whether starting a sole proprietorship in California is easy and beneficial for you or not. Another thing is that the diversity of the market can give your business sky-high success. So, if you are interested, don’t be late in planning; pack your stuff and jump into the ocean of success.
Please contact us if you need any help with the business’s formation.
