Do you want to start your own business and are you considering taking advantage of the Kleinunternehmerregelung (small business regulation)? Do you know how to become a small business in Germany? And what turnover limits apply? Do you know the do’s and don’ts to avoid trouble with the taxman? To help you be as successful as possible, this article will help you avoid the top 6 pitfalls many Kleinunternehmer (small business owners) fall into.
Legally speaking, a Kleinunternehmen is a business that uses the Kleinunternehmerregelung (small business regulation). The size of the company or its legal form is irrelevant, but certain turnover limits must not be exceeded. Registering to use this small business regulation is very simple: You check the box in the Fragebogen zur steuerlichen Erfassung (tax registration questionnaire) you must fill out after registering either your gewerblich (commercial) business or if you’re a Freiberufler (liberal professional), your freiberuflich business.
There are no legal requirements to become a Kleinunternehmer (small business owner of a Kleinunternehmen) – you can even use the Kleinunternehmerregelung (small business regulation) as a Freiberufler (liberal professional). It makes no difference whether you are an Einzelunternehmer (sole trader) or the director of a GmbH (limited liability company). In fact, Freiberufler can use this scheme even if they have not registered a trade. The only important thing is that the tax office has ticked the box on the tax questionnaire form.
In contrast to Kleingewerbe (a different type of small business), the legal form of a small business is therefore irrelevant. And, yes, there is an important difference between Kleingewerbe and Kleinunternehmen. Things are never simple when it comes to bureaucracy in Germany!
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Kleinunternehmer use the Kleinunternehmerregelung (small business regulation), which basically means they don’t have to pay VAT to the tax authorities. Not paying VAT can have both advantages and disadvantages. For full details of the scheme, see our guide.
Umsatzgrenzen: Revenue limits
To qualify for the Kleinunternehmerregelung, the revenue in the year of application must not exceed €22,000 (new limit from 2020, previously €17,500). In the following year, the planned revenue must not exceed €50,000. For those who are already self-employed, the previous year’s turnover cannot exceed €22,000 and the current year’s revenue cannot exceed €50,000. This means that if you exceed these in one year, you cannot use the Kleinunternehmerregelung, but possibly in the following year.
Not crunching the numbers accurately
The Kleinunternehmerregelung can be negative if you have high expenses or make a lot of purchases. This is because, as a Kleinunternehmer, you can’t make VAT deductions.
Incorrect revenue estimation
If you send the tax authorities a deliberately low estimate of your revenue, you may have to pay VAT retrospectively if your business exceeds it. In the case of a surprisingly high turnover, e.g. in the first year of operation, the low estimate will be accepted, but not for more mature businesses that have only underestimated their turnover to qualify for the Kleinunternehmerregelung. Only if the business can credibly prove that the high revenue couldn’t be predicted at the beginning of the year can the business avoid retrospective taxation.
Overlooking the 5-year time limit
If you opt out of the Kleinunternehmerregelung in one year, your decision is binding for the next five as well. Therefore, if you opt out of the scheme in one year in anticipation of a lot of revenue, you won’t be able to opt in the following year if the revenue doesn’t materialise. In other words, your decision for or against the Kleinunternehmerregelung is binding for five years.
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Forgetting to mention your VAT exemption
When you issue invoices, you must state on the document that you are a small business and therefore exempt from VAT under § 19 UStG. Not doing so is illegal.
Regelbesteuerung: Failing to switch to the standard tax system
Businesses will not receive a notification from the tax authorities if their revenue is such that they will no longer be eligible for the Kleinunternehmerregelung in the following year. To ensure that the changeover to Regelbesteuerung (standard taxation) is registered with the tax office on time keep track of your revenue yourself. Otherwise, you may issue invalid invoices inadvertently.
Having more than one Kleinunternehmen
This is not possible for legal reasons alone, as the Kleinunternehmerregelung applies to only one person, not one or more businesses. Therefore, if you have more than one enterprise, the sales from all of them are counted as a total. This means that if you have two businesses below the revenue limit, you cannot benefit from the scheme. Instead, you will be subject to standard taxation.