How to start a sole proprietorship in California in 2025

California has attracted entrepreneurs since the days that gold prospectors flocked to the West to strike it rich — and eventually, it became the place where companies like Apple, Mattel, and Hewlett-Packard began as small businesses. In other words, if you’re interested in starting a sole proprietorship in California, you’re in historically good company.

Whether you're looking to capitalize on the state's thriving tech scene, tap into its booming tourism industry, or bring a unique product or service to market, starting a sole proprietorship here can be your first step toward achieving your entrepreneurial dreams. Below, we’ll talk about some key information that sole proprietors should know, including how to start, register, and get licenses for your California sole proprietorship. 

Jump to:

• What is a sole proprietorship?
• Why consider a sole proprietorship in California?
• California SMB data in 2025
• Steps for how to start a sole proprietorship in California
• Step 1: Choose a name for your California sole proprietorship
• Step 2: File an FNB statement
• Step 3: Obtain licenses and permits for your sole proprietorship
• Step 4: Get an EIN
• Step 5: Open a bank account for your sole proprietorship
• Step 6: Ensure you have insurance for your sole proprietorship
• Step 7: Maintain compliance: Report and pay your taxes
• Sole proprietorship vs LLC in California: What's the difference?
• Benefits of operating a sole proprietorship in California
• Disadvantages of operating a sole proprietorship in California
• How are sole proprietorships taxed in California?
• California resources for small businesses
• Federal resources for small businesses

What is a sole proprietorship?

A sole proprietorship is the most common business structure in which a self-employed individual owns and operates the business. There’s no formal distinction between the owner and the business in this business structure. This means you can report your business income and expenses on your personal tax return (Form 540), making tax season straightforward. However, this also means you’re responsible for all debts and legal issues of the business.

Here are other key characteristics of a sole proprietorship:

• It's the easiest type of business to form, often requiring minimal paperwork and fees.
• You have complete control over profits and losses
• You can make quick decisions without consulting partners or a board.
• Your business remains active until you pass away or no longer wish to operate it.

Sole proprietorships are common for freelancers, consultants, small shop owners, and many other types of small businesses. However, as the business grows, consider changing to a different structure for liability protection and potential tax benefits.

Why consider a sole proprietorship in California?

For many California business owners, a sole proprietorship is the perfect way to continue the Golden State’s proud entrepreneurial tradition. Here are some of the factors that draw business owners in California to this structure:

• Sole proprietorships are easy and inexpensive to start, can accommodate many different business models, and come with a relatively low compliance burden compared to other business structures.
• Sole proprietorship income is reported through the owner’s tax return, which can be advantageous for some entrepreneurs’ financial strategies, particularly in a comparatively higher-tax environment like California.
• California has a large and diverse workforce, so sole proprietorships looking to hire new employees have plenty of options for finding talent.

How much does it cost to become a sole proprietor in California?

It costs nothing to formally establish a sole proprietorship in California. However, depending on your business, you’ll need to pay for licenses, permits, an FBN, and other related expenses.

California SMB Data in 2025 

California’s dynamism, diversity, and natural beauty continue to draw small businesses to the state. These numbers help tell the story of small business success in California:

• California has the fifth largest economy in the world, comprising 14% of the US national GDP.
• California has 4.2 million small businesses, with 7 million workers (or 47.1% of workers in California) employed by those businesses.
• 43%, or $74.9 billion, of California’s 2022 exports came from small businesses.
• The average base salary of a California business owner in 2022 was $152,538 — 8% over the national average.

With small businesses thriving in the Golden State, now could be the perfect time to start your sole proprietorship. Next, let’s look at how to start a sole proprietorship in California.

Steps for how to start a sole proprietorship in California

Ready to start your sole proprietorship? Follow these steps to ensure your entrepreneurial venture begins without a hitch.

Step 1: Choose a name for your California sole proprietorship

If you plan on operating under your legal name (e.g., John Smith Painting), then you don’t have to complete this step. However, if your business name doesn’t include your last name or suggests additional owners (e.g., John and Sons Painting), you must file a fictitious business name (FBN) statement with your county recorder’s office. This is commonly referred to as “doing business as” (DBA).

Before you file, make sure your desired name:

• Isn’t already registered.
• Doesn’t closely resemble another business name.
• Misleads the public.

Check on the California Secretary of State website or at your local county clerk’s office to verify your business name’s availability.

Do I need to register a sole proprietorship in California?

No, but if you’re using a fictitious business name (FBN), you need to register it with the registrar-recorder/county clerk’s office where your business is located.

Step 2: File an FBN statement

Once you’ve chosen a name, it’s time to file your FBN statement to the registrar-recorder/county clerk’s office where your business is located. For example, if your business is in Los Angeles, you would submit your application to LA County. 

Per the California Office of the Small Business Advocate (CalOSBA), you must:

• File your FBN within the first 40 days of operating your business or before your current FBN expires. Fees and documentation requirements vary by county, so check with your local office.
• Within 30 days of filing, publish your FBN statement in a local newspaper once a week for four consecutive weeks.
• File an affidavit of publication with your county clerk’s office within 30 days of the last publishing date.

The filing is valid for five years or until there are changes in the statement.

Step 3: Obtain licenses and permits for your sole proprietorship

After naming your business and filing your FBN statement, the next step is to get the required licenses and permits to operate legally in California. Here’s how you can do it:

Sales and use tax permits

Visit CalGold to determine which licenses and permits your business needs based on your location and industry.

Seller’s permits

If your business involves selling goods or services subject to sales tax, register with the California Department of Tax and Fee Administration (CDTFA) to secure a seller's permit.

Local permits

Depending on your business type, you may need additional local permits or licenses. Check with your city or county government for more details.

Do I need a business license in California as a sole proprietor?

The state doesn’t require a statewide business operating license, but your county or city might require you to get certain licenses, permits, or zoning clearances. Visit CalGold to find out what you may need.

Step 4: Get an EIN

An Employer Identification Number (EIN) is a nine-digit number the IRS uses to identify businesses. There’s no law mandating EINs for sole proprietorships, but you’ll need one if you end up hiring employees. Also, banks often require an EIN to open a business bank account. Luckily, applying for an EIN online is free and easy on the IRS website.

Step 5: Open a bank account for your sole proprietorship

One of the essential best practices for starting a business in California is to keep your personal and business finances separate, and opening a business bank account can do just that. This not only simplifies financial management but also helps you build business credit, which can help secure loans, attract investors, and obtain favorable terms with suppliers.

Many banks and credit unions offer business accounts, so shop around and look for one that best fits your needs. Consider factors like account fees, minimum balance requirements, and additional services like online banking, business credit cards, and merchant services. 

Step 6: Ensure you have insurance for your sole proprietorship 

Remember, as a sole proprietor, your personal assets are at risk in the event of a lawsuit, natural disaster, or other unforeseen event. The right business insurance can help pay for unexpected expenses associated with these risks — e.g., legal costs, property damage, repair costs, etc. — that could potentially deplete your personal and business assets. 

Many types of business insurance are available, including general liability insurance, commercial property insurance, business owners' policy, professional liability insurance, and product liability insurance. How much coverage you need depends on your type of business, so it's a good idea to research, shop around, and work with an insurance agent to find the right policies for your business.

Step 7: Maintain compliance: Report and pay your taxes

Staying on top of your taxes is a key part of running a successful sole proprietorship. Here are some tips to ensure compliance:

• Keep detailed records of your income and expenses. Accounting software such as Quickbooks can help simplify this process.
• Get familiar with tax deadlines to avoid penalties.
• Take advantage of tax deductions related to your business.
• Stay informed of tax law changes that may affect your business. Look into resources like the California Department of Tax and Fee Administration, Franchise Tax Board, and IRS.
• Seek help from a tax professional when needed.

Sole proprietorship vs LLC in California: What’s the difference?

When starting a business in California, you might wonder whether you should form a sole proprietorship or a limited liability company (LLC). Let’s break down some key areas to help you understand the differences between these two types of business structures.

Legal structure

As mentioned previously, you and your business are considered the same entity in a sole proprietorship. With an LLC, there’s a legal distinction between you and your business. 

Liability protection

With a sole proprietorship, you assume full personal responsibility for all business debts and obligations. On the other hand, an LLC protects your personal assets — e.g., home, savings, etc. — from business liabilities. 

Formation

Forming a sole proprietorship in California is simple and requires minimal paperwork, although some businesses will still need a license or permit. Forming an LLC in California requires filing articles of organization and other paperwork with the California Secretary of State, as well as paying fees. 

Taxation

As a sole proprietor, you report your business income on your personal tax return. As an LLC owner, you can choose the default option of having a single-member LLC taxed as a sole proprietorship, or you can elect to be taxed as a corporation by filing IRS Form 8832. 

Ongoing compliance

Other than renewing licenses or permits, sole proprietors have minimal ongoing compliance requirements. LLCs, by contrast, must file a statement of information every two years, pay an annual $800 franchise tax, and meet the other LLC compliance requirements imposed by the State of California.

Benefits of operating a sole proprietorship in California

If you want to start a sole proprietorship in the Golden State, you can benefit from a few perks, including:

Low cost 

Although you may need to pay for applicable licenses, permits, and a fictitious business name (FBN) if you’re using a name other than your legal name, it costs nothing to formally establish a sole proprietorship.

Easy setup

You don’t need to register with the California Secretary of State or go through any other complex processes. However, depending on your business, you might have to apply for licenses and permits at the county or city level.

Flexibility

As a sole proprietor, you have complete control over your operations. You can make decisions and take on new opportunities without approval from board members or other owners. 

Simple tax filing

In California, you can report your business income and expenses on your personal tax return. Generally, you use Schedule C (Profit or Loss from Business) attached to federal Form 1040, which you then use to complete the California Resident Income Tax Return (Form 540).

Direct profits

All your earnings go straight to you. There’s no need to share profits with partners or shareholders. 

Disadvantages of operating a sole proprietorship in California

A sole proprietorship in California offers several benefits, but it also comes with some drawbacks, including:

No liability protection

In California, you and your business are considered the same entity, meaning you’re not protected from business liabilities. If your business incurs debt or runs into legal issues, personal assets like your home and car could be at risk.

Difficult to raise capital

Lenders and investors might view sole proprietorships as higher risks than more formal business structures, making it harder for you to secure funding for growth and other business goals. 

High tax burden

While tax filing is simple, the tax burden can be significant. For one, you’re responsible for paying self-employment taxes on your entire net income, which can add up. Plus, California levies some of the highest state and local taxes in the country, further increasing your financial obligations as a business.

Heavy reliance on the owner

Your sole proprietorship is closely tied to your personal circumstances. For example, if you’re a freelance graphic designer and fall sick for a week, you may lose projects and clients since you don’t have anyone else to take over.

How are sole proprietorships taxed in California?

According to the Franchise Tax Board, here’s how California taxes sole proprietorships. 

Income taxes

As a sole proprietor, you must report all your business income and expenses on the Profit or Loss from Business (IRS Form 1040 Schedule C). This gets included on your individual income tax return (Form 540). If you're a part-year resident or nonresident with California source income, you'll need to file the California Nonresident or Part-Year Resident Income Tax Return (Form 540NR).

Schedule R

If you have income or losses both inside and outside California, use Schedule R to figure out your California source income.

Estimated taxes

Make sure to pay your estimated taxes using the Estimated Tax for Individuals (Form 540-ES). This helps you stay on top of your tax obligations throughout the year. For information on estimated payments, go to our estimated tax payments page.

California resources for small business

The state of California provides lots of resources that can help California solopreneurs get started. Here are some of the major resources that every California small business owner should know about:

• California Small Business Development Center: This collaborative program with the federal Small Business Administration offers a wide range of resources for California SMB owners, including training, financing, advising, and more. 
• California Office of Small Business Advocate (CalOSBA): California offers a one-stop small business portal through CalOSBA that can help business owners with everything from applying for permits and loans to doing business with state agencies. 
• California Small Business Loan Match: This state program helps small entrepreneurs in CA find a loan that’s right for them as part of California’s Loan Guarantee Program.
• CalChamber: The California Chamber of Commerce is a prominent advocacy organization for California businesses and offers numerous resources, including help with navigating California’s complex labor laws.
• California Association for Micro-Enterprise Opportunity (CAMEO): This network of entrepreneurs, lenders, and business coaches works to support California’s smallest businesses with training, advocacy, and micro-lending. 

Federal resources for small business

Federal government agencies, notably the US Small Business Administration, can also help out Texas entrepreneurs with a variety of resources: 

• SBA Loans: The SBA helps small entrepreneurs access capital by working with banks to guarantee loans. Learn about options for getting an SBA-backed loan for your small business here.
• SBIC Directory: The SBA also maintains this database of Small Business Investment Companies (SBICs), which are SBA-licensed organizations that invest in small businesses. 
• SBA Learning Platform: This online platform offers a huge range of educational content and training opportunities for small business owners, with relevant topics ranging from securing funding to disaster recovery. 
• Veteran Assistance Programs: US military veterans may qualify for SBA assistance that can help them start or grow their small businesses, including access to government contracting opportunities.
• America’s Seed Fund: This SBA initiative encompasses two programs, Small Business Innovation Research and Small Business Technology Transfer, that provide grants to small businesses researching innovative technologies. 

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