Anyone who sets up a business on their own and does not choose a one-person corporation (such as a GmbH, UG or AG) founds a sole proprietorship (Einzelunternehmen). This is one of the most common business structures in Germany. Operators of sole proprietorships can be entrepreneurs, business people or freelancers. As a sole proprietor, you are personally liable for all of your business debts. Being a sole proprietor, however, does not prevent you from hiring additional employees.
Key features of a sole proprietorship
- Establishment: Registration with trade office (commercial enterprises only)
- Capital: None required
- Governance: Owner or authorised employee
- Liability: Unlimited with private and business assets of the owner
- Taxation: Income tax, solidarity surcharge, trade tax (not freelancers); some sole proprietors also pay VAT
How to establish a sole proprietorship in Germany
There is no minimum capital requirement for establishing a sole proprietorship, although you will need adequate funds to finance the business yourself (and so you may wish to take out a business grant or loan to get started). Depending on whether your business qualifies as a “small business enterprise” (Kleingewerbe) or a commercial enterprise, you may be required to enter the commercial register.
Small business enterprise (Kleingewerbe) or individual commercial enterprise (eingetragener Kaufmann)?
German law makes a distinction between two types of sole proprietorships: small business enterprises and commercial enterprises. A small business does not need to be entered into the commercial register, while an enterprise must be registered and have the suffix “eK (eingetragener Kaufmann - registered sole trader). An exception is made for freelancing businesses, which are never classified as commercial enterprises.
What counts as a small business enterprise?
The decision as to what can be classified a small business rests entirely with the tax office and is made on a case-by-case basis. As a rule of thumb, if your annual turnover exceeds 250.000 euros and you employ more than five individuals, you will be classified as a commercial enterprise.
How to register a sole proprietorship in Germany
There are different processes for starting your business, depending on whether you are a small business, freelancer or commercial enterprise. If you qualify as a small business, you only need to register with the trade office, who will notify the tax office on your behalf. Once you have received, filled out and submitted a tax questionnaire from the tax office, your company comes into being.
Freelancers do not register with the trade office, but should instead register directly with the tax office. Commercial enterprises need to be entered into the commercial register via a notary before they can register with the trade office. Many types of companies may also need to register with the Chamber of Commerce.
Sole proprietorships (Einzelunternehmen) & liability
As the owner of a sole proprietorship, you are fully liable, with both private and business assets, for all debts incurred in connection with your business. Be aware that this not only includes capital, but also other private assets such as real estate, vehicles, machinery and so on. This unlimited liability makes it especially important to have the correct type of business insurance to cover you against potential risks.
Tax liability of sole proprietorships in Germany
Generally, sole proprietorships are liable to pay business taxes like trade tax, income tax, payroll tax and VAT. However, there are a number of exceptions: one-person commercial enterprises are subject to a special tax-free allowance of 24.500 euros for trade tax; small businesses are exempt from paying VAT; and freelancers pay neither VAT nor trade tax.
Naming your one-man business
When it comes to naming your company, again a distinction is made between small businesses and commercial enterprises. Only commercial enterprises entered into the commercial register have the right to choose their company name. This must be suffixed with the identifier “eK” (registered merchant).
In contrast, small, unregistered companies operate under their own surname and at least one written first name, which can be supplemented by an indicator as to the company’s field.
Management of sole proprietorships
Usually, the owner of the sole proprietorship is also its responsible manager. The owner may also entrust the management of the business to an employee.
Sole proprietorships & Accounting in Germany
If your company qualifies as a small business, or if you are a freelancer, you are not obliged to do double-entry bookkeeping or publish your accounts. However, as soon as the turnover limit is exceeded and you can be classified as a commercial enterprise, you are obliged to follow the bookkeeping rules according to commercial law, which includes preserving all business records for 10 years, publishing data on profits and losses, and utilising double-entry bookkeeping.