Sole Proprietorship: Legal Attributes

This is the simplest form in which to conduct business. A sole proprietorship, commonly referred to as “sole prop,” is not a legal entity itself. Rather, the term refers to a natural person who directly owns the business and is directly responsible for its debts.

While all profits belong to the business owner, so do all losses. Thus, if the business is unprofitable, or other liabilities are incurred, the owner (sole proprietor) is personally liable–that is, the owner puts his or her entire personal assets and wealth at risk in the proprietorship.

Moreover, an owner who is married (or in a registered domestic partnership) puts the community property at risk: community property is liable for the contract obligations of either spouse (or registered domestic partner) incurred during the marriage (or domestic partnership). Cal. Fam. Code § 910(a).

It should be noted that the Wall Street Journal published an article in January 2011 which found that owners of incorporated businesses vs. business owners who file a Schedule C are ten times less likely to be audited by the IRS, i.e., sole proprietors file a Schedule C.

Sole Prop: Formalities

Practically non-existent other than complying with any applicable licensing requirements. If the business is conducted under a name that does not show the owner’s surname or implies the existence of additional owners, the owner is required to file the certificate and publish the notice provided in Business and Professions Code Section 17900 et seq. The fictitious business name[1] statement can be filed online or at the County Registrar Recorder. Additionally, a business license (a.k.a. Tax Certificate) is required for all entities doing business within city limits and can be obtained from the city in person or online. Lastly, a resale permit is required for all businesses selling or leasing tangible property and can be obtained from the city in person or online.

Sole Prop: Formation Start Up Cost

There are no state filing fees. The fictitious business name statement: City of San Diego assesses a $42 fee + ~$15 fee for publication. Business license (a.k.a. Tax Certificate): City of San Diego assesses a $52 fee. Lastly, a resale permit can be obtained free. Please use the following Comparison Chart for side by side comparison.

Sole Prop: Tax Attributes

In light of not being a legal entity itself, it should come as no surprise that the Sole Proprietor is simply subject to personal income tax. It should be noted that in addition to state and federal income taxation, the Sole Proprietor is subject to self-employment tax on all income (no allocation between distribution and salary).

Please use the following Entity Selection Tax Cheat Sheet to predict your tax liability.

[1] One should proceed cautiously when filing a fictitious business name statement because it requires due diligence; for more info, please review the trademark FAQ section that addresses fictitious business name considerations.