Are you thinking about structuring your business as an Einzelunternehmen (sole proprietorship)? Before you make any decisions, make sure you know the advantages and disadvantages of this legal form. Only then you can be sure if a sole proprietorship (Einzelunternehmen) is better than a limited liability company (GmbH, UG) or even a registered merchant (eingetragener Kaufmann – e.K.) for your business.
This article will go show you the about what’s good and what’s bad about the Einzelunternehmen in terms of formation costs, limitation of liability and accounting obligations.
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- Sole responsibility
- No limitation of liability
- Company name restrictions
- Double-entry bookkeeping obligation for large turnovers
What are the advantages of Einzelunternehmen (sole proprietorships)?
As the founder of a sole proprietorship, you are completely flexible and have the utmost freedom to structure your business. Decisions can be made by you alone at any time. There is no need to reach an agreement with other shareholders, etc.
This freedom comes with other perks, such as not having to share your profits with anyone. The profits of your business are yours and yours alone.
Depending on what type of Einzelunternehmen (sole proprietorship) you wish to start, you can skip a lot of formalities.
Freiberufler (liberal professionals) and Kleingewerbetreibende (small traders) don’t need a Handelsregister (commercial register) entry to set up their sole proprietorship or company.
While registered merchants (eingetragener Kaufmann) and founders of most other legal forms (e.g., GmbH, UG) do need to enter their businesses in the Handelsregister (commercial register).
Non-merchants thus avoid a lot of bureaucratic hassle and the fees for entry in the commercial register.
As an Einzelunternehmer (sole trader) who is not entered in the Handelsregister (commercial register), you are not required to prepare a balance sheet and can conveniently keep your accounts using the EÜR (Einnahmen-Überschuss-Rechnung, or income statement). The EÜR is a simplified way to calculate profits by way of comparing income and expenses. This can save you so much time and effort!
On the other hand, if your business has a legal form that has to be entered in the commercial register, you have to use a Bilanz (balance sheet). What this means is a lot of extra work:
- The actual assets and, if applicable, debts and liabilities have to be recorded.
- Inventory has to be created.
- Accrual of expenses and income has to be calculated.
- Current accounts (Kontokorrentkonto) and personal accounts (Personenkonto) need to be kept.
No double-entry bookkeeping
Having a business entered into the commercial register (e.g. UG, GmbH etc.) means you’re obliged to do double-entry bookkeeping (accounting) as well as annual accounts known as Jahresabschluss (inventory).
This type of bookkeeping requires far more time and work than the income surplus statement (EÜR). And, because of the complexity of the accounting, can’t “really” be done without the help of a tax adviser.
To start a sole proprietorship, you don’t need any share capital. A really big point difference compared to an incorporated company such as a GmbH or an AG.
This means you don’t have to deposit a certain amount into your business account, like with other forms of business. For example, you need €25,000 to start a GmbH and €50,000 for an AG. But, you can get started straight away without much equity capital.
What are the disadvantages of Einzelunternehmen (sole proprietorships)?
When you start your own business as a sole proprietor, you carry all of the responsibility on your shoulders. You have to do absolutely everything to set up your business without a business partner to help shoulder the burden with you.
As a sole proprietor, you are liable with all your private assets. Unlike the legal forms GmbH and UG, your liability as a freelancer, small trader or registered merchant is not limited. Thus, in the event of bankruptcy, you are liable with your all of your private assets. This means that you may face private insolvency.
However, if you had a GmbH or UG that went bankrupt, the limited liability of these legal forms would protect your private assets.
Without an entry in the commercial register, sole traders are not allowed to ‘trade under a company name’, i.e. the company name must include the first name and surname of the founder in the case of small traders. For Freiberufler, just the surname is enough.
A purely fanciful name as a company name is not possible for entrepreneurs who are not registered in the commercial register (e.g. GmbH, UG, e.K.).
Here, the company name is known as the Unternehmensbezeichnung in Germany. It’s the name used in business correspondence and on official documents.
All sole proprietorships are obliged to double-entry bookkeeping if the annual turnover exceeds €600,000 or the profit exceeds €60,000. In practice, this means paying a tax adviser a lot of money to look after all your accounting.
Exemption: If you have an agricultural business, in addition to the annual profit limit of €60,000, the value of your usable land is also decisive. If it is below €25,000, you are also exempt from the obligation.
After weighing up the pros and cons, have you decided that the Einzelunternehmen is the best business type for you? Great! Get started now, and you’ll have a fully operational business sooner than you think.
However, if the sole proprietorship is not for you, there are other forms of business that you can also set up on your own:
Don’t forget you always have the option of starting with a sole proprietorship and converting it into a GmbH if and when your business evolves!
Our Einzeluntern (sole proprietorship) series:
5. The pros and cons of the Einzelunternehmen: Weighing up the sole proprietorship in Germany<<<
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