Sole proprietorship Business type

Overview

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

You may:

• File a fictitious business name statement with the county recorder
• Obtain an Employer Identification Number
  • Visit the Employment Development Department for more information

Filing requirements

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:

• Wages
• 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) (2023 Tax form coming soon).

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.

Withholding on California source income

Visit our Resident and Nonresident Withholding Guidelines (FTB 1017).