Summary
A sole proprietorship in Germany links the business directly to its owner, with no separation of assets and full personal liability for debts and obligations. It is quick to establish, with residency in Germany as the main requirement. In practice, sole proprietors are usually classified either as commercial traders or as liberal professionals, each with slightly different obligations.
Contents
What is a sole proprietorship?
A sole proprietorship 💬Einzelunternehmen is the simplest way to run a business in Germany. It refers to any commercial trader 💬Gewerbetreibender or liberal professional 💬Freiberufler who operates a business without partners and without incorporating a company. The person running it is called a sole proprietor 💬Einzelunternehmer.
Key characteristics
- The business and assets are 100% owned and managed by one individual.
- All decisions are made solely by the proprietor.
- The sole proprietor may work alone or employ staff.
- The business owner must have their primary residence in Germany.
It’s important to note that a sole proprietorship is not a separate legal entity in the way a GmbH or UG is. Instead, it’s an organisational structure where the business and the owner are legally inseparable.
Set up your sole proprietorship
Types of sole proprietors
In Germany, sole proprietorships can take different legal shapes where the founder is personally liable. The most common are:
- Small traders 💬Kleingewerbetreibende
- Registered merchants 💬eingetragene Kaufleute (e.K.)
- Liberal professionals 💬Freiberufler
Each has its own criteria and obligations.
Commercial vs. liberal professions
Small traders and registered merchants are considered commercial sole proprietorships.
A liberal professional 💬Freiberufler, on the other hand, is not. This is essentially a non-commercial business limited to certain professional groups such as doctors, lawyers, architects, or journalists. Entry as a liberal profession depends on strict criteria and recognition by the tax office. If approved, liberal professionals are exempted from trade tax and advanced accounting obligations.
💡Does this distinction feel arbitrary? You’re not alone in wondering why some professions are classed as non-commercial and enjoy substantial tax advantages. The reason is largely historical: liberal professions were traditionally seen as independent, knowledge-based occupations that served the public interest.
Small traders
A business is classified as a small business 💬Kleingewerbe if, due to its type and size, it does not need to be structured in a merchant way 💬kaufmännische Weise (§1 (2) HGB).
- Turnover and scale are below the threshold for registration as a merchant.
- No entry into the commercial register 💬Handelsregister is required.
- Governed by the German Civil Code 💬Bürgerliches Gesetzbuch (BGB), not the Commercial Code.
- Bookkeeping obligations are simplified
Registered merchants
If a sole proprietorship reaches a certain scale, tax authorities may classify it as a registered merchant 💬 eingetragener Kaufmann (male) or eingetragene Kauffrau (female), often abbreviated as e.K.
How the status is assessed
The authorities consider the business as a whole, looking at:
- Type of business (range of products, financing, international trade, advertising, warehousing, etc.)
- Scope of business (turnover, assets, staff, business premises, loan amounts).
Indicators
- Annual turnover over €800,000 or annual profit over €80,000 is a strong sign of e.K. status.
- In some federal states, lower thresholds apply (e.g. €250,000 for retail in Berlin).
- More than five employees or loans above €50,000 can also trigger e.K. status.
Once classified, a registered merchant must be entered in the commercial register and is subject to full accounting and reporting requirements under the Commercial Code.
Freiberufler (liberal professional)
The German Partnership Company Act defines a liberal profession as:
‘…the personal, autonomous, and professionally independent provision of services of a higher nature based on special professional qualifications or creative talent in the interest of the client and the general public.’ (§1 (2) PartGG).
Start your Freiberufler business the right way
Typical examples include doctors, lawyers, notaries, tax consultants, architects, journalists, writers, artists and designers. Read more here.
The tax office ultimately decides whether your activity qualifies. If recognised, you benefit from simplified taxation and fewer bureaucratic obligations compared to commercial sole proprietorships.
Set up your sole proprietorship
Formation
Setting up a sole proprietorship is straightforward. Here’s a quick overview. For a detailed step-by-step guide, read our full blog post.
- Some business activities require a special permit or license in Germany, for example selling food, meds or guns. If this applies to your planned company, your very first step should be applying for the relevant license.
- All commercial traders (i.e., small traders and registered merchants) must register with the trade office 💬Gewerbeamt. Freiberufler can skip this step.
- Next, commercial traders and liberal professionals must submit a digital tax registration form within one month of starting business activities. The tax office will issue a new tax number.
If two or more sole proprietors want to enter a partnership they often set up a civil law partnership 💬Gesellschaft des bürgerlichen Rechts (GbR).
Starting capital
With an Einzelunternehmen, you decide how much capital you need to launch your business. There is no legal requirement to deposit share capital into a bank account.
That said, every business needs some funds to get off the ground. Depending on your activity, you may need money for essentials such as a website, equipment, or professional advice from a tax consultant.
Business name
Small traders & liberal professionals
- May use a business designation 💬Geschäftsbezeichnung for branding.
- In legal and business communications (invoices, contracts, letterhead, website imprint) the natural person’s full name must appear. The business designation alone is not sufficient.
- They do not have a company name 💬Firma under the Commercial Code.
Registered merchants
Once entered in the commercial register, they operate under a company name.
- This can be a fantasy or industry name; including your personal name is optional.
- The legal form suffix is mandatory: e.K., e.Kfm. (male), or e.Kfr. (female).
- The name must be distinctive and not misleading.
Business management
As a sole proprietor you are the one in charge of your business. All decisions—from strategy and pricing to hiring and investment—rest with you alone. There are no partners, shareholders or supervisory board to consult, which can be an advantage if you value speed and independence.
The flip side is responsibility. You carry full legal and financial liability for the business. If something goes wrong, your personal assets may be at risk. This makes careful planning, insurance, and professional advice all the more important.
In practice, many balance this independence with outside support:
- hiring staff for operational tasks,
- engaging accountants or tax advisors for compliance, and
- relying on networks or chambers of industry and commerce for guidance.
This mix allows you to stay agile while managing risk in a structured way.
Liability
One of the defining features of a sole proprietorship is unlimited liability. This means there is no legal separation between you and your business. All debts, contracts and obligations are directly tied to your personal assets.
In practice, this entails:
- Business creditors can claim against your private savings, property or other personal assets.
- Insurance can reduce but never fully remove this risk.
- Unlike with a GmbH or UG (LLC), there is no protective ‘corporate veil.’
The upside is that you retain full control and flexibility without the large overheads for administration and bureaucracy. But the trade-off is clear: unlimited liability requires a cautious and well-organised approach.
If you mitigate financial risks with the right insurance coverage, this legal form could be the best fit for your business. Conversely, if your business model carries a lot of risk, a legal form with limited liability, such as a GmbH or UG is the way to go. Read this guide to choose the right legal form for your business.
Accounting and taxes
Your accounting and tax obligations as a sole proprietor depend on whether you are a commercial trader or a liberal professional.
Accounting duties
Small traders and liberal professionals may use simplified single-entry bookkeeping, typically through a simple profit and loss statement 💬Einnahmen-Überschuss-Rechnung (EÜR). While not as complex, keeping detailed and organised records still makes tax returns much easier.
Registered merchants are required to use double-entry bookkeeping and prepare annual financial statements.
Tax obligations
Commercial traders pay income tax 💬Einkommensteuer, value added tax 💬Umsatzsteuer, and trade tax 💬Gewerbesteuer. Read a detailed overview here.
Liberal professionals pay income tax and VAT, but are exempt from trade tax.
Conclusion
Choosing a sole proprietorship is often the first step for many founders in Germany because it combines simplicity with independence. The trade-off is unlimited personal liability, which makes risk management and careful planning essential. For small or low-risk businesses, this legal form can be a practical starting point, while those with higher exposure may benefit from moving to a limited liability company.
