German sole proprietorship (Einzelunternehmern)
The sole proprietorship (Einzelunternehmen) is the simplest form of a commercial or business activity in Germany. This legal form is generally chosen by small companies or also persons with an ancillary trade. In the german view, freelancers are also a type of sole proprietorship (self-employed).
Founding an Einzelunternehmen
A sole proprietorship must be registered for tax purposes at the jurisdictional tax office. Additionally, it must be registered as a local business at the jurisdictional local business office.
Entry in the Companies Register is voluntary. However, note that if a sole proprietorship is entered into the Companies Register, it is subject not only to the “normal” German civil law of the German Civil Code (BGB) but also to the stricter regulations of the German Commercial Code (HGB).
Registration at a Chamber of Commerce or another public institution depends on the activity planned in Germany and the size of the company, and can be omitted in some cases, which is why an individual assessment is always necessary.
No minimum capital is necessary. After founding, it must be registered for tax at the jurisdictional tax office.
Since this is in fact not a company, but the entire business assets are owned by a single natural person, the sole proprietorship is always managed by the owner, i.e. all final decisions are made by him.
However, it is possible to employ not only “normal” employees but also managers or authorised signatories, who can then be entrusted (with parts) of the company management.
A sole proprietorship has no limitation on liability at all, which means the sole proprietor with his entire business assets and private assets is liable for all business obligations. This also applies, for example, if only the business assets are in Germany while the owner’s private property is located in another state.
In Germany, profits gained through a sole proprietorship are considered commercial income and as such, are subject to income tax, the solidarity surcharge, and local business tax.
If the sole proprietorship makes income from self-employed activity (e.g. engineers, lawyers etc.) then the obligation to pay local business tax falls away. It is not always possible to differentiate immediately and without doubt between commercial and self-employed activity, therefore it should be tested thoroughly before beginning with the activity.
Tax on turnover (VAT) is done in Germany essentially independently of the company’s form and is explained in more detail on the next page.