Small business in Germany

Entrepreneurship in Germany
Entrepreneurship in Germany
December 25, 2023
Tax terms in Germany
Tax terms in Germany
January 6, 2024
Small business in Germany

Small business in Germany

Starting a small business brings benefits to you as a founder. However, to take advantage of these benefits, you must choose the proper legal form for your business. Also, you should be familiar with the restrictions and obligations associated with a small business in Germany. This article from Wise Business Group will mention the appropriate legal forms for a small business in Germany.

Self-employment by starting a small business

If you have a promising business idea and intend to establish a company in Germany, one of the options in front of you is to set up a company in the organizational form of a small business. In addition, before choosing the appropriate legal form for your business, you should pay attention to liability and taxes.

Why is it attractive to start a small business in Germany?

Those who have a viable business idea usually tend to become self-employed. However, moving towards self-employment requires courage and clarification of some formalities. A small business offers a terrific opportunity for entrepreneurs in Germany to implement their business ideas without any problems. Also, it’s excellent for founders who want to start their activity as a side business. Even if entrepreneurs have little share capital to set up their company, they can enjoy considerable benefits by choosing the small business format. When choosing a name for this type of business in Germany, the founders should mention their name instead of the company name. Then, they must complete it with an imaginary name or the name of the desired industry.

The first step to starting a small business

You must first register a small business in the target city in Germany if you want to start it. Usually, you will receive a business license on your first visit for registration. You can start doing business only after receiving this license. Entering the commercial register is not necessary for small businesses in Germany. However, depending on the type of business, you may need to provide certain personal or professional documents. For example, you require to have some documents and certificates when starting a craft business in Germany. You must get information about this before you register your small business.

Rights and obligations of a small business

Accounting in small business, unlike classical business, is done solely by using surplus income accounting. In Germany, there is no requirement for a small business owner to keep accounts and create inventory. Also, there is no requirement to specify the company’s receivables and liabilities annually and to publish the company’s annual financial statements in the Federal Gazette. Such cases eliminate the effort for accounting and reduce the costs of hiring a tax consultant by simplifying their assigned tasks.

Trader or freelancer, Selling products or specialized skills in Germany

It is up to the tax authorities to decide whether to classify a new business as a commercial or a freelance activity in Germany. You can usually distinguish these two types of activities according to the items they sell. Therefore, commercial activity in Germany refers to all businesses that see themselves as a manufacturing industry or engage in trade. On the other hand, freelance businesses in Germany sell services that are often artistic or require specific specialized knowledge, such as that which can be learned at universities or similar places.

Freelancers vs. traders in Germany

Hence, freelancers in Germany can be doctors, lawyers, writers, translators, architects, designers, musicians, or other people working in the entertainment industry. Unlike traders, freelancers must only register with the tax office. They are not required to register a small business with the trade office and pay trade tax. They must show the income from their freelance activity in the surplus income statement. On the other hand, traders in Germany must be members of chambers such as the Chamber of Commerce and Industry (IHK) and the like. Also, if the annual profit from their commercial activity in Germany is more than 24,500 euros, they will be required to pay trade tax.

Starting a small business as an individual or as a team in Germany

You can establish your small business as an individual or a group. Liability is the first thing to consider when choosing the appropriate legal form in Germany. Also, you need to consider requirements for accounting, administration, entry into the commercial register, and the amount of capital required.

Starting a small business by a natural person in Germany

Sole proprietorship (Einzelfirma)

The first legal form you can choose to establish your business as an individual in Germany is sole proprietorship. To establish a sole proprietorship, you do not need capital or enter the commercial register but only a business license. In this legal form, all entrepreneurial obligations and possible damages that may arise while conducting a business activity are under the full responsibility of the entrepreneur’s private assets.

Entrepreneurial Company (UG)

However, if you do not wish to accept this personal liability, you can choose the UG legal form for your business in Germany. You can set up a UG company in Germany with only one euro as an initial capital. However, immediately after establishing the business, you must create reserves so that the company’s share capital reaches at least €25,000. These reserves must constitute at least 25% of the company’s annual profit. Setting up a UG company can also come with significant disadvantages, including the entry to the commercial register and having double-entry bookkeeping.

Starting a small business by several natural persons in Germany

Civil Law Partnership (GbR)

A GbR company in Germany is a company under civil law that is the counterpart of a sole proprietorship, with the difference that several people participate in its establishment instead of one person. In this legal form, all partners are mutually and separately responsible with their private assets. Therefore, if one of the partners commits a mistake, all the partners will be responsible for that. There is no minimum capital requirement for establishing a GbR in Germany. Also, there is no requirement to enter the commercial register. However, even if it is not mandatory, we recommend to draw up a partnership agreement.

UG or GmbH legal forms

Just as starting a business as an individual, here you can use the legal forms UG (entrepreneurial company) or GmbH (limited liability company) to limit liability. These legal forms have double-entry bookkeeping requirements while providing limited liability.

Small business regulations

Regardless of the chosen legal form, you can use the small business regulations in Germany if your business has an annual turnover of less than €22,000. As a result, you will not need to submit advance sales tax returns and pay sales tax and trade tax to the tax office.

Business plan for small businesses in Germany

Even for starting a small business, you should not neglect to prepare a proper business plan. At least, you need a professional business plan when looking for an investor or applying for financial or promotional loans. Our colleagues at Wise Business Group can help you prepare a professional and convincing business plan.

An overview of self-employment through starting a small business in Germany

  • A small business in Germany can provide the prerequisites for moving towards self-employment. This type of business is attractive for founders who want to start without worries, with low capital, or as a side business.
  • Business registration and obtaining a license is essential for starting a small business in Germany. Entering the commercial register is not required. However, depending on the business, some documents may be required.
  • Accounting for a small business in Germany is simple and is done using surplus income accounting. Also, there is no obligation to keep accounts and publish annual financial statements in the Federal Gazette.
  • You can use the legal forms of sole proprietorship, UG, GbR, or GmbH to set up your small business in Germany as an individual or a group. However, you should pay attention to things such as liability, requirements related to double-entry bookkeeping, and entry into the commercial register.

Registering and setting up a small business in Germany

You can contact us via email or WhatsApp for advice on setting up and registering a small business. Our consultants will guide you by benefiting from hundreds of successful experiences in starting a business in Germany. Also, we can help you choose the appropriate legal form and prepare a professional business plan that is attractive to investors.

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