Definition “sole proprietorship”
A sole proprietorship is a type of partnership with one partner who can conduct his business activity as a “registered merchant” (e. K.) within the meaning of the German Commercial Code (HGB). Sole proprietorships can be run by freelancers, farmers and tradesmen and can also employ staff.
A distinction is made between the following forms of sole proprietorship:
- Small traders
- Tradesmen merchants
Advantages and disadvantages of a sole proprietorship
Sole proprietorships can be established informally and without proof of financial reserves, i.e. without a minimum capital contribution, as is required for corporations. Owners can dispose of their business without restriction, make decisions and freely dispose of profits. Therefore, they do not have to conclude a partnership agreement unless they take on a silent partner.
The merchant registered for a sole proprietorship has unlimited personal liability for his business activities with all his business and private assets. This entails risks, but also gives the owner prestige because he stands unreservedly for his business.
As freelancers, sole proprietors are exempt from trade tax and from compulsory registration with the Chamber of Commerce.
Start a sole proprietorship: What you need to bear in mind
Unlike corporations, sole proprietorships can be established informally and quickly. Unless sole proprietorships take on a silent partner, they do not have to conclude a partnership agreement.
Merchants who establish a sole proprietorship must have it entered in the commercial register in accordance with § 29 HGB. The company name must consist of at least the first and last name of the owner and the suffix “e. K.” An addition indicating the activity is possible, such as “Autowerkstatt Marco Schmidt e. K.”. Registered sole proprietorships are subject to the provisions of the German Commercial Code (HGB).
Other tradespeople can voluntarily register their business in the commercial register, but are not required to do so. Sole proprietorships that are not registered in the commercial register operate under the first and last name of the entrepreneur, who, however, may not call himself “owner”. The regulations of the German Civil Code (BGB) apply to these unregistered sole proprietorships.
Special tax features of sole proprietorships
All owners of registered sole proprietorships and sole proprietorships without registration with a turnover of EUR 600,000 or more or an income of more than EUR 60,000 must prepare a balance sheet. For non-registered sole proprietorships with lower turnover and earnings, the accounting regulations of the Fiscal Code (§ 141 AO) apply. They must submit a revenue surplus account.
Sole proprietorships are obliged to pay turnover tax unless they fall under the small business regulation.
If sole proprietors carry out activities within the meaning of the Trade Tax Act, they are obliged to pay trade tax, which is partially credited against income tax. Freelancers are exempt from trade tax.
The owner of sole proprietorships is liable for income tax, not the sole proprietorship.
Tradespeople are obliged to be members of the Chamber of Industry and Commerce (IHK) or the Chamber of Crafts (HWK). An exception are freelancers, who are exempt from chamber membership.