Sole proprietorship in Germany

A sole proprietorship is one of the most common and popular legal forms for startups in Germany. This type of company has numerous tax and legal benefits for people who plan to start their business alone in Germany. On the other hand, the founder of a sole proprietorship must also bear the entrepreneurial risk alone. Startups in Germany often cannot be considered a principal income source immediately after launch. Hence, they use this opportunity to run their sole proprietorship as a small business. In this article from Wise Business Group, we will explain a sole proprietorship and its advantages and disadvantages for founders in Germany. Also, we will mention some points that need to be considered when starting this type of business.

Sole proprietorship in Germany

A sole proprietorship in Germany refers to all businesses established by an individual and not run as a corporation. As the founder of a startup in Germany, you can set up a sole proprietorship without the involvement of any other person or shareholder. However, there is no obstacle to hiring employees in this company. The founder of a sole proprietorship in Germany can make all the decisions alone because the full ownership of the company is at his disposal.

A sole proprietorship is considered a separate legal form in Germany. This legal form has a simple setup process that often consists of two steps: registration at the Trade Office and registration at the Tax Office.

Types of sole proprietorships in Germany

Different types of sole proprietorships exist in Germany, each with its own characteristics. The types of Sole Proprietorships in Germany are:

• Business (Gewerbe)
• Small business (Kleingewerbe)
• Registered merchant (Eingetragener Kaufmann (e.K.))
• Freelancer (Freiberufler)

In the following, we will describe the features of each in detail.

Business in Germany

Those sole proprietorships registered in the relevant trade office for commercial purposes are called businesses. Businesses conducted for commercial purposes in Germany often have the following characteristics:

• The work is carried out independently and responsibly.
• The founder works with his account and tax number.
• The purpose of doing the activity is to earn profit.

Small business in Germany

In Germany, the so-called small business is not an official legal form defined in the Commercial Code or Trade Regulations. A small business in Germany is often characterized by two prominent characteristics as follows:

• It has simple accounting.
• Merely submitting the Surplus Income Statement (EÜR) at the end of the year is sufficient for it.

Using small business regulations can also be another characteristic to identify a small business in Germany. However, the ultimate decision on who can be considered a small business owner in Germany rests with the tax office. This decision’s results can make it possible to enjoy some tax benefits.

Registered merchant (eK) in Germany

All persons who run a commercial business in Germany are considered merchants according to the Trade Regulations (German Trade Regulations, Paragraph 1, Section 1). Any business operation carried out in a company in Germany is considered commercial. The only exception to this definition is if the type and scope of the company is such that it does not require a commercially organized business operation (German Trade Regulations, Paragraph 2, Section 1). In practice, the tax office decides whether or not to apply “merchant status” to a sole proprietorship in Germany. If a sole proprietor is recognized as a merchant must enter the German commercial register and have double-entry bookkeeping.

Freelancer in Germany

Freelancers in Germany occupy a special place among sole proprietors. They do not represent merchants. Therefore, they do not need to register a business. Registration with the tax office is sufficient for purely freelance activities in Germany.

Steps to register a sole proprietorship in Germany

Business registration is mandatory for all sole proprietors in Germany, except for freelancers. Founders must go through the following steps to register their business in Germany:

• Opening a business account
• Obtaining required approvals, if any
• Registering the business in the Trade Office
• Completing the tax registration questionnaire
• If necessary, entry into the commercial register (specifically, for registered merchants (eK))

Liability of a sole proprietorship in Germany

A sole proprietorship in Germany is not a legal form with limited liability. It means that the liability of the owner or founder of this company in case of bankruptcy is not limited to the business assets. They are also responsible with all their private assets.

It also applies, for example, if the products or productions of a sole proprietorship in Germany harm its customers or employees, and the company is required to compensate them.

If you want to start a sole proprietorship in Germany, you should be aware of these things before starting your business and include them in your risk assessment. The risk of entrepreneurship in this legal form is high and, if combined with the liability of encroachment on all private assets, can cause significant problems for an entrepreneur if it fails.

Types of taxes for sole proprietorships in Germany

If you intend to choose the legal form of sole proprietorship for your business in Germany, you must be aware of the types of taxes and duties you will be required to pay. Also, it is necessary to pay attention to personal taxes besides taxes related to the company. Generally, the taxes payable for founders of sole proprietorships in Germany are:

• Trade tax that all founders of sole proprietorships in Germany, excluding freelancers, must pay if they have an income of more than 24,500 euros.
• Sales tax that only small businesses are exempt from paying it in Germany.
• Income tax
• Church tax, if applicable

Advantages of sole proprietorships in Germany

Starting a business with a sole proprietorship legal form in Germany can bring various advantages. For example, startups achieve entrepreneurial independence by choosing this legal form in Germany. Setting up such a business is quick and inexpensive. Also, despite having full legal status immediately after its establishment, the company needs no share capital. Using regulations related to small businesses also simplifies accounting and tax liabilities.

Generally speaking, the advantages of a sole proprietorship in Germany are as follows:

• Its establishment process is simple.
• It has low startup costs.
• It does not require share capital.
• It is not necessary to have a partnership agreement in it.
• It has no obligation to disclose annual financial statements.
• It has fast decision-making processes as it is run by one.
• It has the chance to get a loan.
• Entering the commercial register is usually not required for it.

Disadvantages of sole proprietorships in Germany

However, setting up a sole proprietorship in Germany can also bring disadvantages. For example, limitation of liability is not possible in this legal form. Therefore, the founder must bear all the business’ costs, responsibilities, and risks and set up and manage his business alone. In terms of legal capacity, a sole proprietorship in Germany can always sue or be sued in court.

The main disadvantages of a sole proprietorship in Germany are as follows:

• Its founder is responsible with all his business and private assets.
• There is no feedback on decision-making processes.
• Adding more owners is not possible.
• There is a possibility that the company will suffer financial losses if the founder is sick.
• The founder is required to pay income tax and not corporate tax.

For whom is it suitable to establish a sole proprietorship in Germany?

A sole proprietorship has very few entry barriers and bureaucratic obligations. Hence, it can be an ideal entry point for new entrepreneurs.

This legal form in Germany often does not require a partnership agreement, certification, or entry into the commercial register. Therefore, startups can significantly save their time, effort, and money. As mentioned earlier, establishing a sole proprietorship does not require share capital. Thus, it creates the opportunity for founders, especially those with little capital, to spend their whole funds on starting their businesses instead of paying legal and notary fees.

The two main parameters of simple establishment processes and low startup costs often characterize a sole proprietorship in Germany. However, mistakes here can be very costly. So, careful planning is essential to start such a company.

We recommend that you get the help of a consultant to set up your business in Germany from the beginning. Hence, you will be in a good position and ensure your security against the problems and risks ahead. Also, you can prepare a business plan, send a request for financing, and get a loan professionally and correctly with the help of a consultant.

You can contact us to learn about the critical points of preparing a professional business plan that attracts the attention of investors and immigration authorities.

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An overview of starting a sole proprietorship in Germany

• A sole proprietorship is a popular legal form for startups in Germany. This company is set up and managed by only one person.
• To register a sole proprietorship in Germany, you must first open a business account and obtain the necessary approvals. Then, you must register your business with the Trade Office and Tax Office and enter the commercial register if necessary.
• This legal form does not have limited liability, and its founder is liable with all his business and private assets in case of bankruptcy.
• Taxes payable for a sole proprietorship in Germany often include trade tax, sales tax, income tax, and church taxes.
• A sole proprietorship in Germany has simple establishment processes and low startup costs. Also, it does not require share capital or partnership agreement. On the contrary, it has a high entrepreneurial risk, and any mistake can be costly here.

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Setting up and registering a company in Germany

You can contact us for advice on setting up and registering a company in Germany. Our consultants will help you go through the process of setting up your business in Germany in the correct way and as quickly as possible. Also, they will support you in matters such as choosing a legal form, preparing a business plan, receiving the required approvals, completing a tax questionnaire, and entering the commercial register in Germany. You can ask us questions in this field through the WhatsApp link below.

You can also complete the following form and send it to us to hold an online consultation.