Einzelunternehmen: Everything you need to know about sole proprietorships in Germany

Contents

• What is an Einzelunternehmen?
• Legal forms
  • Gewerblich (commercial) vs. Freiberuflich (liberal)
  • Kleingewerbe (small traders)
  • Eingetragene Kaufleute (registered merchants)
  • Freiberufler (liberal professionals)
• How to set one up
• Starting capital
• Business management
• Liability
• Accounting
• Tax
• Want to know more? 

 

 

What is an Einzelunternehmen?

An Einzelunternehmen is a business run by a sole proprietor or sole trader.

More specifically, if a Gewerbetreibender (commercial trader/business person) or Freiberufler (liberal professional) has a:

• business without partners, and
• doesn’t incorporate a company (GmbH, UG etc.),

this person has an Einzelunternehmen and is known as an Einzelunternehmer (sole proprietor).

But a general description is as follows:

• The business is run by a single person – an Einzelunternehmer
• There is no management team
• Decisions are made solely by the Einzelunternehmer
• An Einzelunternehmer can work either work alone or employ staff
• One person owns 100% of the business
• The Einzelunternehmer’s primary place of residence is in Germany

As you can see, an Einzelunternehmen is not a legal form but rather an organisational structure of a business.

 

What kind of legal forms can an Einzelunternehmen have?

Generally, sole proprietorships have legal forms in which the founder is personally liable for the business, such as:

• Kleingewerbetreibende (small traders)
• Eingetragene Kaufleute (e.K.) (registered merchants)
• Freiberufler (liberal professionals)

As you can see, there are numerous Einzelunternehmen classifications. Let’s dig into this a little deeper.

 

Gewerblich (commercial) vs. Freiberuflich (liberal)

Kleingewerbe (small businesses) and eingetragener Kaufleute (e.K.) have “gewerbliche Einzelunternehmen” (commercial sole proprietorships) in Germany.

A Freiberufler, on the other hand, runs a “freiberufliche Einzelunternehmen” (this is essentially a non-commercial sole proprietorship run by a person who has a “liberal occupation”). But, not just anyone can become a Freiberufler. There are a bunch of legal requirements you have to meet – and only open certain professional groups qualify (more on this below).

 

Kleingewerbe (small business/small traders)

There is a “small business” version of an Einzelunternehmen, which goes by several names: Kleingewerbebetrieb, Kleingewerbetreibende or Kleingewerbe (confusing, but at least there’s a common theme).

A business is a Kleingewerbe if the tax office decides it is one. That is, because of its type or size, it doesn’t need to be structured in a “kaufmännischer Weise” (“merchant way”) (§ 1 (2) of the German Commercial Code ). In other words, it doesn’t have the characteristics of an eingetragener Kaufmann (registered merchant) type business.

What this means in practice is that there are criteria (a major one being turnover) that determine whether your sole proprietorship is a Kleingewerbe or, in fact, an e.K. (that is, as touched on in the previous paragraph, a business that is structured in a “merchant way”).

For Kleingewerbe, entry into the Handelsregister (commercial register) isn’t necessary and, thus, isn’t regulated by the German Commercial Code (HGH).

Instead, the general and tax regulations of the German Civil Code (BGB) apply. Thus, Kleingewerbe only have to worry about simple bookkeeping and accounting obligations such as the EÜR.

To understand this concept better, let’s explore the e.K. a bit more in-depth.

 

Eingetragene Kaufleute (registered merchants)

When you first decide to be your own boss, you may have every intention of being a sole trader/freelancer. But, the authorities may have other ideas – and you may find yourself as an eingetragener Kaufmann (e.K.) if you’re a man or an eingetragene Kauffrau (e.Kfr) if you’re a woman.

The authorities decide whether a business has an e.K.-legal form on a case-by-case basis. This is subject to a wide range of discretion and, thus, doesn’t have a concrete legal definition. But, let’s unpack this to give some idea of what to look out for.

What are the e.K. criteria?

The company as a whole is what matters most and not any single factor. That is, there are many pointers that the authorities look for before making such an assessment.

Type of business

The tax office will examine what the business does and how it operates. If a business does any of the following, then it builds the qualitative case that it should be an e.K.:

• Variety of products and services, and business relationships
• Use and granting of external financing
• Participation in bills of exchange and cheques
• Active or passive use of freight transport
• International trade
• Extensive advertising
• Largescale warehousing

 

Scope of business

The stats of the business are a big part of whether an Einzelunternehmen  is given an e.K. status:

• Sales volume (not balance sheet profit)
• Fixed and current assets (€100,000+ is what matters)
• Number of employees, including temporary and shift workers (more than 5 puts you in the e.K. range)
• Size of business premises (the office size and storage space are not critical given modern IT infrastructure.)
• Number of business premises and branches abroad (the more you have, the more likely you’re an e.K.)
• Loan amounts (more than €50,000 is considered significant)

Turnover

Generally, if an Einzelunternehmen generates €600,000 turnover annually, it has an e.K. status.

If the business fluctuates wildly (i.e., does large transactions infrequently) or is seasonal, it’s not the annual turnover that matters but the turnover during peak times.

However, this doesn’t apply universally. The federal states set turnover thresholds for different industries. For example, in Berlin, if a retail Einzelunternehmen makes more than €250,000 in turnover p.a., it’s likely to be a registered merchant.

 

Freiberufler (liberal professional)

The Partnership Company Act defines a freier Beruf (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 ).

It is not always easy to determine which profession belongs to the liberal professions. Here is a list of specific professional groups that can help:

Notaries, lawyers, tax consultants, pharmacists, non-medical practitioners, designers, journalists, and consultants.

Ultimately, the tax office decides whether your activity makes you a Freiberufler or not.

 

 

How to set up an Einzelunternehmen

Setting up a sole proprietorship is simple. Here is a quick rundown of what it takes. If you want something more in-depth, check out our guide.

• All Gewerbetreibender (e.g., Kleingewerbe, e.K) must register with the Gewerbeamt (trade office).
• Freiberufler must register their businesses with the tax office by applying for a tax number (Steuernummer).
• Both Gewerbetreibender and Freiberufler have to submit the completed Fragebogen zur steuerlichen Erfassung (“Questionnaire for Tax Registration”) to the tax office within one month of operations.

Starting capital

With an Einzelunternehmen, you decide how much capital you need to start your business. There is no legal obligation to deposit share capital (Stammkapital) into a business account.

However, this doesn’t mean you don’t need money to get started. Depending on the nature of business, you’ll need cash for things like a website or advice from a tax adviser.

Business name

Kleingewerbe can use a fancy, industry or activity name for their business. However, the IHK recommends always using the first and last name, even if there is no legal obligation to do so (which means, essentially, you do have to do this).

Tip: In business transactions, the proprietor’s first and last name and registered address must appear next to the business name or at the bottom of the page. The same goes for its website’s Impressum (imprint).

Kaufleute who are entered into the Handelsregister (commercial register) can include their first and last names in the company name – but they don’t have to. That is, they can stick to a pure business, industry or fancy name. For example:

• Müllers Buchhandel e.K.
• Pension Abendstern e.K.
• Sisyphus e.Kfr.

 

Business management

As a sole proprietor, you alone make all the decisions. There are no partners, shareholders or management board to report to, which has its benefits. But, on the flip side, you shoulder all the responsibility and take on all the risk.

Liability

As an Einzelunternehmer, you’re directly liable without limitation for your business up to the statutory seizure limits.

Before you begin operating, do a thorough cost-benefit analysis of using the Einzelunternehmen legal form for your business.

For example, if your business’s revenue is on the smaller side, your liability risk is naturally much lower. In this scenario, the benefit of (much) lower overheads to operate an Einzelunternehmen may outweigh the liability risk. And if you mitigate this risk with the right insurance coverage, this legal form could be the best fit for your business.

Conversely, if your business transactions have a lot at stake, a legal form with limited liability, such as a GmbH or UG is the way to go.

Accounting

Kaufleute have the legal obligation to keep double-entry bookkeeping. Due to the size and type of your business, the authorities make you do a more sophisticated accounting.

Freiberufler and Kleingewerbe, on the other hand, are free from this obligation. But, doing high-quality single-entry bookkeeping will make tax returns less of a hassle.

Taxation

In terms of tax law, you generate income as a business. But, exactly how much tax you have to pay depends on the status of your Einzelunternehmen.

As a Gewerbetreibender (that is, not a Freiberufler), you pay:

• Gewerbesteuer (trade tax),
• Einkommensteuer (income tax), and
• Umsatzsteuer (VAT).

Freiberufler, have to pay income tax and VAT but are exempt from trade tax.

Don’t forget: As a sole proprietor, you’re personally liable for all debts, including to the tax office.

 

Want to know more?

Our Einzelunternehmen (sole proprietorship) series: 

• What is a Freelancer?
• What is a Kleingewerbe?
• What is a Freiberufler?
• The pros and cons of the Einzelunternehmen
• How to set up an Einzelunternehmen

Master list:

All Company Formation blog articles in one place

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