How to Start Your Sole Proprietorship in 6 Simple Steps

Tom
Tom February 2022 Content Creator 9 min

Table of contents

While becoming an entrepreneur is often seen as ‘going it alone’, this might not be the case. As an entrepreneur you can start your business with one or several partners, entering into a much more collaborative enterprise. If you start your own business by yourself, however, you are what’s called a ‘sole proprietor’.

It’s important to understand how to start your sole proprietorship if you are thinking of starting a business and wondering if you should get anyone else involved. Being the sole proprietor requires knowing which forms to fill out and your tax situation will also be unique. The legal form for the sole proprietor refers to both merchants and freelancers or small traders. Each of these categories differ in key ways.

If you’ve decided to go it alone with a sole proprietorship, let’s go through some of the basics to help you get started in Germany the right way. 

Sole proprietorships in a nutshell

  • The sole proprietorship is a business run by one person, with no distinction between business and individual
  • Advantages: simple registration process, no difficulties with co-founders
  • Disadvantages: full liability for actions, handling taxes yourself
  • There are three different legal forms for sole proprietors in Germany
  • Follow our six steps to establish your sole proprietorship

What is a sole proprietorship?

Called an Einzelunternehmen in German, a sole proprietorship is a business run by one person and legally demonstrates no distinction between the individual and their business. The registration process for the sole proprietorship is actually the simplest kind of commercial or business activity in the country. If you plan to run a small business or perform paid work on the side of your primary income, sole proprietorship is likely the best tax fit. 

What are the advantages and disadvantages of sole proprietorship?

Most important before deciding how to approach your business is to weigh the pros and the cons. Only by doing this will you be able to approach your business venture successfully.

The pros and cons of starting a sole proprietorship

Advantages

The sole proprietorship is the most popular form of business ownership in Germany and there are many reasons for this. 

As mentioned, the registration process is simple. You need only register your business, open a shop, and you can start trading. This kind of arrangement is perfect for newcomers to self-employed work because, if you’re not yet convinced your business venture will earn you a full-time wage straight away, you can begin as a sole proprietor in addition to your primary source of income. In this way, the arrangement is flexible according to your needs. 

As a sole proprietor you are also not beholden to anyone. Running a business with co-founders and partners has the risk of becoming complicated, especially when the partnerships include friends and family. Without any of this to worry about, you’re free to run the business the way you want.

Disadvantages

One of the positives of sole proprietorship also functions as a potential drawback. While co-founding a business and running it with partners can cause trouble, it’s also a huge undertaking to do something like this by yourself. As the sole proprietor you are liable for all of your business related actions. You will need to keep track of your taxes, you will be the person to blame for falling sales—you will have no one with whom to share responsibility. 

The different types of sole proprietorships

There are different types of sole proprietorships, each of which offers its own set of pros and cons, depending on the kind of business you want to run. Under the sole proprietorship banner are: 

Registered traders (eingetragene Kaufleute (e. K.))

This type of sole proprietor is one entered in the commercial registry. That’s what the e. K. stands for. You qualify for this type if your business is a trade (§ 1 Para. 1 HGB). You may be exempt from registering depending on the size and type of your trade (§ 1 Para. 2 HGB).

Small traders (Kleinunternehmer)

As a kleinunternehmer, due to your low earnings you’re not required to pay VAT. Not having to do this keeps your taxes very simple, however you can choose to charge and pay VAT if it will benefit you in the long run. 

Freelancers (Freiberufler)

A type of sole proprietorship restricted to a set of professions according to income tax law  income tax law (EStG § 18), a freelancer in Germany pays taxes depending on their amount of income. Check our post on becoming a freelancer in Germany for information on the qualifying professions and earning amounts.

Remember that even though they are founded by a single person, the one-person AG, GmbH, and UG count as corporations, not sole proprietorships.

How to start a sole proprietorship: 6 steps to success

Getting your business going by yourself seems daunting at first glance. That’s why it always helps to break down the steps and take it one at a time. The six steps below will help you approach your dream methodically and sensibly.  

  1. Business idea and business plan
  2. Open a business account
  3. Registering a business for your sole proprietorship
  4. Registering your sole proprietorship with the tax office
  5. Registration with the employers’ liability insurance association, the Chamber of Industry and Commerce, and the Chamber of Crafts
  6. Register with the employment agency (Agentur für Arbeit)

Founding step 1: Business idea and business plan

Begin with a clear idea for your business and a well-thought-out plan. With these things in order, you’re much more prepared to provide your local tax and trade offices with accurate information regarding your finances and activity. This is also the only way for you to be sure about the conditions that apply to you and with which legal form you’ll need to register. 

If you’re still on the hunt for a fitting idea, have a look at our article about how to find a business idea.

Founding step 2: Open a business account 

Sole traders are not obliged to open business accounts, but keeping your business and private payments separate from the beginning is nonetheless a good idea.

With a digital business account you can access your finances wherever you are, divide them into sub-accounts, and add integrations to take care of your financial needs with versatility. You’ll also be able to issue team debit cards and you can open an online business banking account in minutes. 

Always keep an eye on your finances – with the Penta Business Account.

Founding step 3: Registering a business for your sole proprietorship

Freelancers are the only type of sole trader not required to register their business before beginning activity. To register your sole proprietorship, fill out a trade licence and submit it to the appropriate trade office. Your licence will include your legal form, personal data, business content, and bank account details. 

Registration also requires a fee. Your fee will depend on which trade office you register with, although it is likely to be between €30 and €50. To save yourself the trip, check if your local trade office allows for registration online. 

Founding step 4: Registering your sole proprietorship with the tax office

Once you’ve registered, the Trade Licencing Office (IHK) will forward your information to the tax office. You then receive the tax registration questionnaire, which you’ll fill out to provide a realistic estimate of your expected turnover. The tax office will determine your income tax required in the year of founding your business. If applicable, you can also indicate here that, fitting into the small business regulation category, you are exempt from paying turnover tax. 

Consult a tax advisor if you have any concerns about filling out the required documents. You may wish to avoid extra costs like this as a sole trader, but the fees you incur providing inaccurate tax information will be much worse. 

Tax number for Freiberufler

To obtain a tax number, as a freelancer you must register yourself with the tax office. The same goes for tradespeople: you fill out the questionnaire and receive your tax number. The tax office will also check to confirm that your business activity meets the requirements for freelancing.

As a sole proprietor, you are subject to income tax and must submit a tax return. You will also pay turnover and trade tax—only the freelancer is exempt from this. 

Founding step 5: Registration with the employers’ liability insurance association, the Chamber of Industry and Commerce, and the Chamber of Crafts

All sole proprietors must belong to a professional insurance association. Freelancers are the exception again, however most freelancers are free to join statutory accident insurance. Certain freelance activities are also subject to compulsory insurance. 

The activity you perform will determine the trade insurance association (Berufsgenossenschaften) responsible for you. Check the DGUV website for an overview of which insurance companies are responsible for which activities. 

You may also need to register with the Chamber of Industry and Commerce or another chamber. Certain activities also require further permits: craftspeople are required to submit a master craftsperson’s certificate or prove having worked for a number of years. Find out which are the permits and certs you might need and which regulations you should be aware of. You’ll save time later if you begin by obtaining all the necessary documents and certifications. 

Commercial register for traders

You’re required to enter your business into the commercial registry after having carried out commercial activities to a certain extent. Business owners in particular are legally obliged to do this. Your annual turnover or number of transactions will also help determine this obligation, as the threshold value for turnover is €100,000.

Founding step 6: Register with the employment agency (Agentur für Arbeit)

Your final step is to apply for a company number (BBNR)—however this is only necessary if you as a sole trader employ some of your own staff. You can apply for the number from the employment agency (Bundesagentur für Arbeit). With this number you can be identified as a company. It is required in order for you to submit social insurance notifications. 

Your path to a successful sole proprietorship 

As you can see with the steps laid out in this post, starting a sole proprietorship means you’ll have many things to do, but if you break it down into steps, it should feel less daunting. Above all, a successful business is all about submitting the right documents, filling out the forms correctly and belonging to the ideal tax class for you. Beyond that, you just have to put your passion into practice.  

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