Sole Proprieter
Overview for Sole Proprietors

(Before we begin the forms, here is basic information about sole proprietorships and taxes.)

What is a Sole Proprietorship?

  • A sole proprietorship is a business owned by one person. Sole proprietorships can have employees and operate in all the ways that a corporation or partnership can. The difference is that the financial and legal responsibility for everything rests with the owner. The owner has unlimited liability, which means that his/her personal assets can be used to pay for business debts.

Can my Spouse be a Co-Owner?

  • California is a community property state, so unless you use pre-marriage assets to fund the business, your spouse is automatically a co-owner - whether they work in the business or not. This means that they are equally liable for any losses and will equally benefit from any gain.
  • If your spouse is directly involved in the business, you can treat (him)/her as an employee or as a partner. The advantage of staying a sole proprietor and treating your spouse as an employee is that you can deduct health insurance premiums for your entire family as a business expense. The downside of this is that you have to do payroll paperwork for income paid to your spouse and you must provide the same health insurance benefits to your other employees so your benefits aren't "top heavy". For more information about Section 105 tax deductions for health expenses, click here.
  • Alternatively, you can treat your spouse as a partner, eliminating payroll paperwork, but still give your spouse separate payments to social security. You will not be able to deduct heath insurance premiums for any partner.
  • Finally, some businesses stay as sole proprietors with no compensation paid to the spouse. The IRS doesn't really care as long as your business' profit before paying the owners is less than $118,500. If it is more, you need to treat your working spouse as an employee or a partner so that enough social security self-employment tax is paid. With this option, you will not be able to deduct health insurance premiums for you or your spouse as a business expense.

What if I Want Limited Liability Protection?

  • You can consider forming an LLC or a corporation. Both provide the same limited liability protection. In general, limited liability companies are more flexible than corporations because you do not have to have annual meetings with minutes. If you do not have outside employees, paying LLC owners involves significantly less government paperwork than corporations do. However, corporations are a bit easier to have outside investors who are not involved in the business. Both have roughly the same costs.
  • Limited liability protection will not protect you from actions that you took yourself or from tax obligations. You can purchase insurance for your actions (professional liability, errors and omissions).

Can I Incorporate or Form an LLC Later?

  • Yes, but legally and for tax purposes, you will have to "close down" the sole proprietorship and "open" the new corporation or LLC. Your customers won't be affected, but you will have to go through the paperwork and accounting processes.

Revenue Versus Profit

  • Hopefully your business will have lots of sales...however, don't make the mistake of believing that your sales revenue is available for hefty personal salaries or business expansion. Payroll must be paid first. Then you will have to pay for your cost of goods and your operating overhead. A little less than 50% of the amount remaining must be paid in taxes (28% federal; 15.3% self-employment tax + state taxes ). The remaining is available for your after-tax salary and business expansion.
Business License and Other Local Requirements

Each city's business requirements vary. The following is a general description of these requirements.

Before you sign a lease or purchase equipment:

  • Verify that your proposed location complies with zoning requirements (including parking requirements and fire regulations).

  • Find out from the city building department if there are any code compliance issues.

  • If you are preparing food, talk with the County Environmental Health Department to verify that they will allow you to use existing equipment and facilities.

Zoning Permit

  • Usually you only need to get a zoning permit if you are changing the use of a building or if you are starting a home occupation business. Cities charge a nominal fee for home occupation permits ($50 is common). However businesses which want to change the existing use of a building may pay a fee, depending on the complexity of the request.

Business Tax/License

  • Most cities require anyone who conducts business in their city to obtain a business license and pay a business tax each year. The initial business license fee is usually the minimum business tax plus an administrative fee. In future years, the business tax is based on gross receipts, number of employees, or other criteria. The exact criteria depends on your type of business and your city's policies.

Home Occupation Permits

  • Home occupation permits are usually issued by the Planning (or Community Development) Department and are required before you obtain a business license. Business owners must agree to comply with the city's home occupation restrictions. These generally include:

  1. No visible sign of the business
  2. No altering the home
  3. A space limit for the business (example, 25% of the home)
  4. No employees
  5. No large deliveries or significant storage
  6. Off-site parking for vehicles
  7. No hazardous materials
  8. Limitations on what business you can operate (example, no barbershops)

Contact the Planning Department for a Complete List.

Sign permit

  • Many cities regulate the size, color, placement and number of signs you can display. This includes temporary signs and "sandwich boards" placed on the sidewalk. They may also require a building permit to install permanent signs. In general, home businesses cannot have business signs.

Other necessary permits

  • If you are making renovations or want to put a planter outside your door, chances are that you'll need a sign or building permit.

Fire inspections

  • Commercial buildings are inspected annually by the fire department. This service is generally free except for restaurants, bars, theaters, and other places of public assembly, which may be charged an annual fire permit.

Handling food

  • If you handle food in any way, you'll need a Health Permit. This is typically issued by the County Environmental Health Department.

Questions?

  • Please contact your local city or county.

D&B, SIC, or NAICS

Many companies require their vendors to provide D&B, SIC or NAICS numbers before they will conduct business. These numbers are available at no cost.

D&B Number

  • Dun & Bradstreet is a private company which monitors business credit. They provide a free number to any business that is willing to wait 30 days. They also provide expedited Duns numbers and credit services on a fee basis.

  • To obtain a free D&B number, click here and enter your business ownership information.

  • Business credit is established through trade references, which are reported on a voluntary basis to a company such as Dun & Bradstreet. Usually, new businesses must wait a few months to start establishing credit. If you want to establish business credit with Dun & Bradstreet, you can provide references to Dun & Bradstreet, which they will verify to give you a credit rating. This is a fee-based service, and you must have 4 to 6 references which Dun & Bradstreet can verify. You can also improve your credit rating by providing D&B with information about contracts that you have received. For more information, visit http://www.dnb.com or call (800)234-3867.

  • Other resources available through the bookstore:

    1. All about Credit

    2. ABCs of Getting Out of Debt

    3. Credit Repair Kit

SIC Number

  • SIC stands for Standard Industrial Code, which is a system that categorizes all products and services. The SIC system is being replaced by the NAICS system (below), but some companies still request an SIC number. To obtain an SIC number, go to http://www.osha.gov/pls/imis/sicsearch.html and enter your product or service. If you sell multiple products or services, you may have multiple SIC codes.

NAICS Number

  • NAICS stands for North American Industry Classification System, which has replaced the SIC system to categorizes all products and services. To obtain your NAICS number (no charge), go to http://www.naics.com/search.htm and enter your product or service. If you sell multiple products or services, you may have multiple NAICS codes.

Patents, Trademarks, and Copyrights

A patent is an exclusive right conferred by law to an owner of an invention to exclude others from making, using, or selling the patented invention for a limited time. The government grants this temporary monopoly in exchange for a full description of how to make and use the invention. The cost of obtaining a patent depends on the type of invention and the degree of complexity involved. To ultimately receive a patent, the owner of the invention will need to file a nonprovisional patent application. Roughly, the costs may range from about $5,000 to about $7,000 for an extremely simple invention (such as a golf training aid) to more than $15,000 for an invention involving highly complex technology (such as telecommunication technology). Some points to be aware of include the following:

  • Patents only protect you in the jurisdiction in which they are obtained. Therefore, a U.S. patent only prevents people from making, using, or selling the invention or a product that contains your invention in the U.S. If your patent has realistic market opportunities and high economic potential consider patenting it in other countries as well.

  • Be prepared to pay periodic fees to maintain your patent.

  • Patents are only valuable if they are valid and enforceable.

All these factors point to the reason that professional patent attorneys are usually hired. Despite that, you can do some of the work to lower your costs. See Resources below.

Before we Begin...a Warning on Scams

3 Types of Patents

There are three types of patents:

  • Utility: A utility patent may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, compositions of matter, or any new useful improvement. For further information, visit http://www.uspto.gov/patents/resources/types/utility.jsp

  • Design: A design patent may be granted to anyone who develops distinctive visual ornamental characteristics for a manufactured item. The design must be a definite pattern or shape, applied to an article of manufacture. An example of a design patent would be a toothbrush manufactured to look like a spaceship, or an ornamental design for a cell phone case. For further information, visit http://www.uspto.gov/patents/resources/types/designapp.jsp.

  • Plant: A plant patent may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

Resources

    You can find out what patents have been filed that are the same or similar to your product by using Google's search tool.

    Patent search tool from Google

    You can search and apply for patents online at the Patent and Trademark website: http://www.uspto.gov/patents/index.jsp

  • Please remember that the wording (especially the claims) for patents is critically important to validity and enforceability and that a professional patent attorney should be consulted.

  • Providing a full and detailed description including drawings to your patent attorney can reduce cost.

  • Patent applications are carefully scrutinized and often rejected for revision by the USPTO. Thus, you should budget for prosecution expense (the "back-and-fourth" with the Patent Office) after your application is filed.

Questions?

  • For questions, you can call the U.S. Patent and Trademark Office at: (800) 786-9199.

Software Concerns

  • If you have written software (or have employees or independent contractors who have written software), please consult an attorney to discuss whether to patent, copyright, or obtain trade secret protection!

Trademark vs Service Marks

  • Trademarks are generally the words, logos, phrases and symbols used by manufacturers to identify the goods that originate from them. However, trademarks may also include sounds (e.g., the NBC chimes), scents (e.g., a fragrance for sewing and embroidery thread), colors (e.g. "pink" for insulation), and shapes (e.g., a silhouette of an "apple" for computers). Subject to limitations, almost any symbol, name, word, or device capable of distinguishing the source of goods may be used as a trademark.

  • Service marks are used to identify the source of the services of one individual or organization from those provided by others. Service marks and trademarks function in the same manner except that service marks identify the source of services rather than goods.

What to do

  • You can talk with an attorney experienced in trademark matters or do your own computerized search with help from your county or local law library. There are also professional search services that can do trademark database searches for you or your attorney (typical charge: $300 to $400 for a basic screening search).

  • Once you have researched the trademark for potential availability, the cost for filing for registration is about $1000 including attorney fees and fees to the U.S. Patent and Trademark Office. You cannot register a trademark unless it is being used in commerce (although you may apply for registration based on an "intent-to-use") and you will lose your trademark protection if you do not continue to use it in commerce. If you use your trademark in multiple states or serve customers in more than one state, you should register the trademark with the U.S. Patent and Trademark Office at: http://www.uspto.gov/trademarks/index.jsp. The trademark registration process can take close to a year.

Copyrights

  • Copyrights protect "tangible expression" such as that found in written documents, songs, recorded performances, computer programs, and art work (including advertising). The cost is very low (about $35 per application to register a work if you do it yourself online) and it is possible for nonprofessionals to do - although the more valuable your work, the more worthwhile it is to have an attorney involved.

  • Alternatively, a fee for filing an application for registration using paper forms is about $65. To request the appropriate paper copyright registration form, visit: http://www.copyright.gov/forms/.

  • Appropriate paper forms include:

    1. Literary (example: Novels, poetry, articles) (TX)
    2. Single Serials (example: Serials, magazines, newsletters, newspapers) (SE)
    3. Sound Recordings (SR)
    4. Performing Arts (example: Song lyrics) (PA)
    5. Visual Arts (VA)

  • The law is very strict on requiring written agreements if the copyright is assigned to another individual, a partnership, corporation or other entity.

  • The best practice is to consult with an attorney before commissioning any work or using someone's work.

  • Questions about the process or the forms? Visit http://www.copyright.gov/

Disclosure

  • The information herein should not be used or relied on as legal advice or opinion about specific matters, facts, situations or issues.

  • You should consult a lawyer about your particular circumstances before you act on any of the information contained in these pages because the law changes, can vary from jurisdiction to jurisdiction, and may not apply to your situation. This information is intended to assist you in understanding the basics of intellectual property law. It is not a complete guide and should not be considered legal advice.

Business Insurance

Owning a business can often mean that if you get sick or injured, you get a double-whammy: the illness (with its expenses) and no more income. Insurance is extremely important.

The National Association of Insurance Commissioners have a tutorial which explains the forms of insurance and gives tips for evaluating insurance options. Go to http://www.insureuonline.org/smallbusiness/

Below are some basic forms of insurance. Only workers compensation is required by law. However, some landlords and businesses involving hazards will only conduct business with you if you have proof of insurance.

Types of business insurance

Property insurance:

  • For theft or fire. Earthquake and flood protection must be purchased separately.

Liability insurance:

  • If you are sued by someone

Business interruption:

  • Provides substitute income if your business is damaged from theft or fire.

Key person insurance and group life insurance:

  • Provides a lump-sum payment if a key person dies or cannot work anymore.

Home-Based business insurance:

  • Covers items not normally covered with a homeowners policy, such as inventory and office machines.

Commercial auto:

  • Covers you and your employees for work-related accidents.

Workers compensation insurance:

  • Required by law for businesses with employees. Pays for expenses and provides income if employees are injured while performing the job.

Health insurance:

  • Pays for medical expenses (except expenses covered by workers compensation insurance).

Talk to an agent:

  • Every business owner should discuss their insurance needs with an authorized agent. In particular, home occupation businesses should review their homeowner's policy to determine whether that policy covers their home business.

On-the-job injuries:

  • If you have employees, you are required by law to carry workers compensation insurance. However, this insurance is generally not available to business owners. Instead, sole proprietors and partners must carry their own health and disability insurance.

Ask vendors for certificate of insurance:

  • Before you conduct business with others - especially if they will handle your products or will perform a potentially hazardous job (even driving a car), ask them to provide you a certificate of insurance from their insurance carrier.