How to set up an Einzelunternehmen: Your guide to starting a sole proprietorship in Germany

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Einzelunternehmem: What is a sole proprietorship?

If you want to start your own business but don’t want to incorporate a company (UG or GmbH), an Einzelunternehmen or Einzelgewerbe (sole proprietorship) could be the answer.

The sole proprietorship is considered a separate legal form and is the easiest business to start in Germany. Setting one up involves a straightforward registration and avoids most of the red tape of an incorporated company.

There is a brief summary of what an Einzelunternehmen is below, but if you want to know more, we’ve got you covered. 

Einzelunternehmen: Here are the sole proprietorship basics: 

• No special requirements
• Liability is unlimited with the private assets of the owner
• No initial or minimum share capital needed
• Employment of employees possible
• No further partners/owners are possible
• For commercial business activities (Gewerbliche Tätigkeit as opposed to freiberufliche Tätigkeit)

Here you can find out more about the advantages and disadvantages of a sole proprietorship.

 

Types of Einzelunternehmen (sole proprietorships)

In Germany, being a sole trader is categorised differently. Depending on what your business does, you could be a Gewerbetreibender (commercial trader), Freiberufler (liberal professional freelancer) or an eingetragenen Kaufmann (merchant).

Depending on how big your business is, you could also take on the Kleingewerbe (small business) status by using the Kleinunternehmerregelung (small business regulation).

 

Gewerbetreibender (trader)

Traders have the following characteristics:

• Self-employed/operates independently
• Work is invoiced using the business’s tax number
• The business activity intention is to make a profit

 

“Gewerbe” is a commercial activity that is not related to a liberal profession or agriculture, forestry, fishing and mining. Thus, if you’re a sole proprietor whose business falls under the “gewerblich” category (the tax office always makes the final decision about this), then you are a “Gewerbetreibender“.

If you regularly offer services or products to make a profit (e.g., on eBay), the activity is considered to be gewerblich. 

Freiberufler (liberal professionals)

Not all sole traders in Germany are Gewerbetreibender (commercial traders). Some sole traders have businesses that categorise them as Freiberufler (liberal professional).

And if they practice purely as a liberal professional, no Gewerbeanmeldung trade registration) is required.

Although Freiberufler (liberal professionals) do have businesses that are Einzelunternehmen (sole proprietorships), the focus of this article is Gewerbetreibender (traders).

Kleingewerbe (small traders or small businesses)

A “Kleingewerbe” (“small trader” or “small business”) is not an official legal form, as it’s not defined in the Handelsgesetzbuch (Commercial Code) or the Gewerbeordnung (Trade Regulation Act).

Generally, this term refers to a business that only has to do simple bookkeeping and an EÜR (income statement). Small businesses also use the Kleinunternehmerregelung (small business regulation), which grants VAT exemptions.

Ultimately, the tax office decides who qualifies as a small trader.

 

Eingetragener Kaufmann (e. K.) (merchants)

In Germany, there are different business categorisations you should be aware of. For example, a Kaufleute or Kaufmann/Kaufrau (merchant) (§ 1 (1) HGB) is someone who operates a Handelsgewerbe (commercial enterprise). But, falling under the Kaufleute category does have implications. Let’s unpack this more below.

• Kaufleute (merchants) are merchants who operate a Handelsgewerbe (commercial enterprise) (section 1 (1) HGB).
• Handelsgewerbe (commercial enterprises) are categorised as Gewerbebetrieb (trade businesses).
• The operator of such a business is deemed to be a Kaufleute/Kaufmann (merchant).
• But, if the type and scope of the business are not structured in a “kaufmännischer Weise” (“merchant-like way”) (§ 1 Para. 2 HGB), then the business operator is not considered to be a Kaufleute/Kaufmann (merchant).

 

The Handelsgesetzbuch (German commercial code) provides this rough description. Confused? Don’t worry: In practice, the tax office decides whether the “Kaufmannseigenschaft” (“merchant status”) applies to an Einzelunternehmen (sole proprietorship).

If the tax office considers you a Einzelkaufleute (sole trader merchant), you’ll have to register your business in the Handelsregister (commercial register) and keep double-entry books.

 

How to start an Einzelunternehmen: Your checklist

Capital

No start-up capital is required for setting up a sole proprietorship as you don’t have to provide proof of your available funds like you do with the GmbH or UG. But it makes sense to have some anyway – it’s hard to set up a business without any investment. Think about the initial costs you’ll have to cover. These can include:

• Gewerbeanmeldung (trade registration)
• Setting up a website
• Purchase of a domain
• Office rent
• Software licences
• Staff
• Tax advice

 

Location

Anyone who does not want to rent a shop or office (at first) may, in theory, run a sole proprietorship from home. For many, this is the first logical step toward entrepreneurship.

But be careful because this isn’t possible at every residential address. Throughout Germany, municipalities and city districts decide where businesses can operate – and where they cannot. In purely residential areas, this is often not allowed.

For tenants, there are additional rules. First, don’t run a business in a private flat without asking the owner (it doesn’t matter if the tenancy agreement mentions it or not). Secondly, don’t just rely on a verbal agreement – get written consent before you start operating.

Establishment

The first step is to register your sole proprietorship with the Gewerbeamt (trade office). But before you do that, check whether you need a trade licence (Gewerbeerlaubnis). If so, apply for the permit.

The Gewerbeanmeldung (trade registration) itself is uncomplicated and inexpensive. You can either submit it in person to the Gewerbeamt (trade office) or do it online (unfortunately, the latter doesn’t exist everywhere in Germany yet).

After a successful trade registration, the new business is entered into the Gewerberegister (trade register). The Trade Office informs other authorities and chambers of commerce about the new business:

• Finanzamt (tax office)
• HWK / IHK (chamber of trade/chamber of industry or commerce)
• Berufsgenossenschaft (employer’s liability insurance association)

 

Liability (Haftung)

As a sole proprietor, business liability is personal, unlimited and jointly and severally. There is no limitation of liability. And you’re liable with your private assets.

 

Business name (Unternehmensbezeichnung)

The name of a sole proprietorship is subject to a few rules and regulations.

As a sole proprietor, you should include your full name (first name and surname) in the business name. Although the legal obligation to do so has been abolished, it has to be clear that the business and the proprietor are identical. For example, “Klaus Müller, Florist” or “Rechtsanwältin Britta Hausen”.

Other rules apply to branding and advertising purposes. For these reasons, you can use an Etablissementbezeichnungen (establishment name) such as “Restaurant zum Berg” or “Versicherungscheck 360°.”

But there is a catch: Your name must be clearly written on all invoices, business cards, correspondence and the Impressum (imprint/legal notice). In other words, it must be easily recognisable to outsiders which natural person is running the business.

Get a tax number & set up bookkeeping

Your information from the trade registration (Gewerbeanmeldung) is automatically passed on to the tax authorities. Soon after that, your local tax office will ask you to fill in a tax questionnaire.

Since 2021, the data has been requested entirely via the government online portal called ELSTER.

After successfully registering at the tax office, you will receive a Steuernummer (tax number) and VAT identification number (if desired), which you will need for every invoice. Only now can you really get started, write your first invoices, and pay taxes correctly.

Now is the best time to set up your Buchhaltung (bookkeeping)!

A sole proprietorship has no managing director

As the owner of a sole proprietorship, you are treading on legal ice if you use the term “Geschäftsführer” or (“managing director”). This is due to the fact that the term is officially only used for companies under the HGB (German commercial code). An outsider could, therefore, be misled as to the size, legal form and creditworthiness of the company. To avoid confusion, you should generally refrain from using this title and instead use “Betriebsführer” (“business manager”) or “Inhaber” (“owner”).

 

Employing people as a sole proprietor

Even as a sole proprietor, you can employ staff and build up a large company. You can employ staff in the traditional way as a permanent employee, but it is also possible to hire freelancers, working students, or mini-jobbers. All employment relationships have advantages and disadvantages; for example, there is always a certain amount of bureaucracy.

If you want to employ staff in your company, you need a company number. If this is not the case, you can apply for a company number at a later date at the employment agency.

 

Want to know more?

Our Einzeluntern (sole proprietorship) series: 

1. What is an Einzelunternehmen?
2. What is a Freelancer?
3. What is a Kleingewerbe? 
4. What is a Freiberufler?
5. The pros and cons of the Einzelunternehmen
6. How to set up an Einzelunternehmen<<<

We also have a Master list of all Company Formation articles