Small business in Germany explained: Requirements, limits and benefits

• Definition
• Exceptions
• Small business vs. merchant
• Ideal founders
• Registration
• Advantages
• Disadvantages
• Small business vs. small business regulation
• Takeaways

A small business/small trader 💬Kleingewerbe can be operated as a sole proprietorship or as a GbR. Its defining feature is that of being a commercial enterprise that doesn’t have to comply with:

• the German commercial code 💬HGB, or
• other commercial  💬kaufmännisch regulations.

The legal reason why this is the case is that the authorities deem a business to be ‘keinen kaufmännisch eingerichteten Betrieb erfordert’ (‘not required to be set up as a commercial/merchant business’).

When is a business not a small business?

Whether or not a business requires to be a “kaufmännisch eingerichteten Geschäftsbetrieb” and therefore not a Kleingewerbe (small business) depends on many factors:

Type of business

• Variety of products, business relationships and services
• External financing (utilisation and granting)
• Participation in exchange, cheque and freight transactions
• Particularly international activity
• Large-scale warehousing
• Extensive advertising

Size of business

• Volume of transactions
• Fixed and current assets
• Number of employees
• Number and size of branches
• Foreign branches

Total turnover

There are revenue thresholds that, if crossed, make you pretty much a Kaufleute. That is, your business must be a “kaufmännisch eingerichteter Betrieb”.

• Retail trade (Einzelhandel) from €250,000
• Wholesale (Großhandel) from €300,000
• Production (Produktion) from €300,000
• Services (Dienstleistungen) from €175,000
• Restaurants (Gaststätten) from €300,000
• Hotel industry (Hotellerie) from €250,000

If your business is seasonal, the tax office measures its revenue a bit differently. That is, it’s not the annual turnover that is decisive but the revenue during the peak periods.

Credit volume

Amounts below €50,000 are not relevant.

What matters most?

In general, the business as a whole ultimately determines whether it is classified as “kaufmännisch” or not. If you suspect this may be the case for your business, get advice from the IHK or a good tax adviser.

Small business vs. merchant

A small business has to follow the civil code 💬BGB, while merchants 💬Kaufleute (also: Kaufmann, Kauffrau) have to follow the more stringent regulations of the commercial code 💬HGB.

Who is a Kleingewerbe ideal for?

There are many scenarios in which a Kleingewerbe is the perfect business form. Let’s explore them below:

• Side business: A Kleingewerbe is ideal if you want to start a side business because of the relative ease in starting and operating one.
• Testing the market: This business type is for you if you want to try out an idea to see what happens. It’s wise to avoid the costly starting and operating costs of the other legal forms if you just want to test the waters.
• Flexible working hours: A small business is suitable for people who want to work part-time such as parents. The flexibility of the Kleingewerbe also serves students and pensioners who want to do something entrepreneurial but not on a large scale.

How to register a Kleingewerbe

Gewerbeamt (trade office)

To start operating as a Kleingewerbe, you first need a Gewerbeanmeldung (trade registration). You do this at your local Gewerbeamt (Trade Office).

Finanzamt (tax office)

After registering with the Gewerbeamt, you’ll receive a letter from the Finanzamt (tax office). Completing the tax questionnaire and submitting it to the tax authorities is the next step in the setup process.

 IHK or HWK

As well as a letter from the tax office, expect something from the IHK (chamber of industry and commerce) or HWK (chamber of trades/crafts. Membership with the IHK or HWK is mandatory for all ‘gewerblich‘ type businesses.

Handelsregister (commercial register)

Only Kaufleute (merchants) must be entered in the Handelsregister (commercial register).

Any kind of Gewerbetreibender (sole trader) can be entered into the commercial register voluntarily as a small business owner. But, don’t do this unless you have an exceptional reason because it comes with a lot more red tape.

Berufsgenossenschaft (employer’s liability insurance association)

A further obligation for entrepreneurs is to register with the relevant Berufsgenossenschaft (employer’s liability insurance association) – a body responsible for statutory accident insurance. It’s on you to get in touch with them so make sure you put it on your to-do list.

Gewerbeerlaubnis (trade or business licence)

As a Kleingewerbe you also have to check whether you need special permission for your trade. This comes in the form of a business licence. Check with the IHK or HWK to see if this is something you have to do.

Advantages of a small business

The Kleingewerbe’s biggest advantage is that it can be set up with ease and little expense. What this means in practice is that there is no minimum capital requirement. And, you don’t have to worry about an Eröffnungsbilanz (opening balance sheet) – the income statement (EÜR) is enough. But, the advantages don’t stop here:

• Although you have to pay Gewerbesteuer (trade tax), you have an allowance of up to €24,500 annual turnover.
• You don’t need to prepare a Bilanz (balance sheet) and don’t need to take an inventory.
• There is an exemption from doing complicated double-entry bookkeeping. No need to worry about annual accruals and deferrals of receivables and liabilities, nor publishing a Jahresabschluss (annual accounts).
• If you earn less than €22,000 per year, you can skip the simplified form of accounting (EÜR) and just submit a tax return to the tax office.
• With the Kleinunternehmerregelung (small business regulation) with the tax office, you can avoid VAT.

As you can see, the Kleingewerbe advantages are not only the enormous time savings and financial advantages but also its competitive edge. As a business, not charging VAT allows you to either sell your goods/services cheaper than your competition or at the same price with a healthier profit margin.

Disadvantages of a small business

A downside of the Kleingewerbe is that the proprietor assumes all the responsibility and risk for the business. Before starting this type of business, think carefully about taking on this unlimited liability. If someone sues your business, your private assets are on the line too.

There are also disadvantages regarding its Geschäftsbezeichnung (business name). As a small business is not entered in the Handelsregister (commercial register), it can’t use a Firmenname (company name). Rather, it must use a more restrictive Unternehmensbezeichnung, which contains the full name of the sole proprietor.

A Kleingewerbe has more freedom regarding its Geschäftsbezeichnung (business name), which can be used for advertising or PR. But, when it comes to business transactions, the Unternehmensbezeichnung has to be used to make it clear who the proprietor is.

Another downside is high taxation as soon as you hit a certain turnover threshold:

• If you earn more than €22,000 (always check with the tax office for the most up-to-date amount) or waive your Kleinunternehmerstatus (small business status), you must pay VAT. (This also means the additional hassle of a yearly VAT return.)
• The obligation to pay Gewerbesteuer (trade tax) kicks in when you start bringing in €24,500 annually.

Small business vs. small business regulation

A small business is not entered in the commercial register and not subject to HGB regulations

Small business regulations (VAT act) can be used by any company fulfilling the regulations. The legal form of the company is irrelevant.