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Setting Up a Sole Trader in Germany: Budget-Friendly Support

Setting Up a Sole Trader in Germany

Updated on Sunday 17th December 2023

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Setting Up a Sole Trader in Germany
 
The sole trader is the simplest business form that may be incorporated in Germany. It is generally preferred by those who wish to set up a consulting business or who are able to provide various services by themselves. Our lawyers in Germany will explain this process in detail to you. 
 
EU citizens who move to Germany are allowed to work in the country as self-employed individuals. The only requirement for them is to inform the Registry Office (Einwohnermeldamt). Non-EU citizens may also start a business as self-employed individuals provided that they have previously applied for a residence visa in Germany. After three years, non-EU self-employed individuals may also apply for permanent residence visas if the work they rendered had a positive impact on the German economy. In this case, the positive impact is represented by an investment and a number of jobs the individual creates.
 
One of our attorneys in Germany can give you additional information about the requirements for this simple business type, especially if you are a foreign national looking to start a small business. Our lawyers can also help you open a bank account in Germany for your new business.
 

What are the main characteristics of the sole trader in Germany?

 
A German sole trader is a form of business indicating the owner is fully responsible for the company’s liabilities. The sole trader must register with the jurisdictional business and tax offices, however, this simpler business form does have lighter registration requirements and registration with the German Trade Register is voluntary. The Business Licensing Office will differ according to the city in which the activity takes place. For example, those who wish to start a business or trade in Munich will have to contact the local Point of Single Contact.

When this registration with the Trade Register does take place, however, it is important to note that the sole trader will be subject to the regulations that apply to all registered companies in Germany, namely those in the Civil Code and the Commercial Code. This is not to say that without registration the sole trader is subject to no regulations, however, there are some issues to take into consideration, particularly since the liability of the owner is unlimited. One of our company registration lawyers in Germany can give you complete details on the rules and regulations that apply to sole traders.
 
The sole trader must also use the suffix “registered trader” and certain sole traders may also be required to apply for certain special licenses with the relevant German authorities before starting their business. The trade license is obtained from the local trade office and for this purpose, the applicant will need to:
 
  • pay the fee: a trade license will require a fee and its value varies according to the municipality where the application is submitted;
  • complete the form: the application form can be filled in at home or at the trade office and will include the details about the business.
  • provide identification details: the applicant is required to present a passport and copies thereof if requested.
  • additional documents: when the sole trader is registered with the Commercial Register, as stated above, the applicant will also need to bring the registration certificate.

When a sole trader engages in freelancing work, he will need to provide not only details about himself but also about the operation. When filling in the information about the trade, craft or activity, the description should be accurate (the approval of the application may depend on the accurate description). When the sole trader engages in several activities, all of these should be included. Examples can include web design, textile and/or accessory manufacturing, food production, consulting services and the domain in which these are offered and many others. When the activities are carried out by the sole trader from his home address, then he will enter that address in the application form.
 
Registration with the adequate professional association and an insurance company will be required if an additional employee is hired. The sole trader can also appoint authorized signatories for the sole trader. This is different than hiring employees and will mainly include appointing another individual and entrusting him to take over some parts that are related to the general management of the business. Consultants, accountants and other professionals who offer services in this manner might use an appointed manager to handle the administrative issues related to the sole trader business. However, it is advisable to ask for the legal advice from one of the experts at our law firm in Germany about establishing a sole trader and hiring employees later during the business activity because certain professions may have different requirements.
 

Types of sole proprietorship in Germany

 
There are different types of sole proprietorships in Germany, depending on the category they fall under. Here is a list of these types, provided by our German lawyers:
 
  • Gewerbetreibender (trader): The most common type of sole proprietorship in Germany. Individuals are self-employed, operate independently, and their primary goal is to make a profit. They typically invoice their work using the business's tax number. Importantly, Gewerbetreibende engages in commercial activities. The tax office ultimately decides whether a business falls into this category, based on the nature of the activities;
  • Freiberufler (liberal professionals/ freelancers): This represents a specialized category of sole proprietors who offer professional services that rely on their intellectual and creative skills. Some of the industries where you can become a freiberufler include law, medicine, IT, architecture, engineering, journalism, and artistic pursuits like writing, music, and fine arts. Freiberuflers are not required to register their business with the local authorities as they do not engage in commercial activities; 
  • Kleingewerbe (small business): This is not an official legal form, it represents businesses that involve relatively simple bookkeeping and can benefit from Kleinunternehmerregelung (small business regulation), which grants VAT exemptions. The tax office has the authority to determine which businesses qualify as small traders;
  • Eingetragenen Kaufmann (merchant): This type of sole proprietorship in Germany refers to individuals who operate a commercial enterprise. The operator of such a business must follow a "kaufmännischer Weise" (merchant-like way) of structuring the business. Whether a sole proprietorship qualifies as a merchant is ultimately determined by the tax office.
 
Our law firm in Germany can help you determine the appropriate structure for sole proprietorship and help with the tax registration.  
 

Key aspects of opening a sole proprietorship in Germany

 
There are a few important aspects you need to know before you open a sole proprietorship in Germany. 
 
Unlike some other business structures like GmbH or UG, no specific start-up capital is required to establish a sole proprietorship. However, it is advisable to have some initial funds available because starting a business typically involves various expenses, including trade registration, website setup, domain purchase, office rent (if applicable), software licenses, potential staffing costs, and tax advice. You can ask for advice from our accountants in Germany to manage your expenses. 
 
Sole proprietors have the flexibility to run their businesses from different locations. Many start from home, which is often the first step towards entrepreneurship. However, it's important to note that not all residential addresses are suitable for running a business. Municipalities and city districts in Germany determine where businesses can operate, and purely residential areas may have restrictions. For tenants, running a business in a private flat usually requires written consent from the owner, even if it's not explicitly mentioned in the tenancy agreement. Your location will also be important for VAT registration in Germany, as you must register at your local tax office. 
 
Sole proprietors in Germany have specific rules and regulations regarding their business names. Traditionally, it's expected that the business name includes the full name (first name and surname) of the proprietor to make it clear that the business and the individual are identical. However, there is some flexibility for branding and advertising purposes, allowing for the use of establishment names. Regardless of the chosen name, it is crucial that the proprietor's name is indicated on all invoices, business cards, correspondence, and the Impressum (imprint/legal notice) to ensure transparency about the person behind the business.
 
Our German law firm can offer more advice on these aspects and help with the registration of the Trade Office. 
 

What are the advantages and disadvantages of sole traders in Germany?

 

One of the greatest advantages of establishing a sole trader in Germany is the simple registration procedure. Also, the capital that must be invested in a sole trader is significantly lower than the start-up costs setting up a German company involves. All profits will go to the owner and a sole trader is easier to manage and control. The owner of a German sole trader may also change the legal status of the business if the company expands.
 
Nevertheless, there are also a few disadvantages when setting up a German sole trader. One inconvenience is the fact that the owner has an unlimited liability that includes expands to his or her own assets and the debts of the sole trader will be paid up using personal assets if need be. 
 

How is a German sole trader taxed?

 

A sole trader is subject to tax on the profits derived from a German source. This includes the corporate income tax, the local business tax, the solidarity surcharge, and value-added tax. In some cases, taxation may differ according to whether or not the activity is perceived as a self-employed activity. In this case, the local business tax does not apply. We do recommend that entrepreneurs get accustomed to situations in which income is considered commercial and not derived from a self-employed activity (such as for a lawyer who would provide legal counseling as a sole trader). The value-added tax applies to sole trader activities with the standard rate of 19% and the reduced 7% rate for some types of goods and services (hotel accommodation, entertainment, food, books and magazines or newspapers).

A number of tax incentives are available in Germany for start-ups and small or medium businesses. These can consist of allowances that are granted during the pre-investment phase or during the time the investment is made. Businesses can also deduct relevant expenses when these are incurred as a result of their particular business activities. For example, for a sole trader, the business meal expenses can be deducted (up to a certain amount, usually around 30%) and in some cases also other expenses. You can talk to one of our lawyers in Germany for complete details about the deductions that can be made under this business form.

The sole trader does have a set of important advantages, especially for first-time entrepreneurs and those who are willing to start their own business and offer services in their area of expertise. However, despite the fact that the lower set-up and maintenance costs are particularly advantageous for entrepreneurs who are entering into their first business venture, it is particularly riskier for them because of the unlimited liability they have in case of business failure.

The owner of a German sole trader may change the legal status of the business if the company expands or if he finds that he needs the added protection against liability offered by the common private limited liability company. This business form, the GmbH in Germany, is a preferred option should the expansion of the business become necessary. In this case, the start-up capital and the maintenance expenses are higher than for the sole trader but the shareholder is only liable up to the extent of the invested capital. Unlike in the case of the sole trader, the GmbH has a legal identity.
 

Statistics on Germa​n businesses

 
If you want to learn more about sole proprietorship, our attorneys in Germany have gathered some interesting statistics about German businesses:
 
  • In Germany, the percentage of self-employed individuals as a proportion of the total employment in 2021 was approximately 8%;
  • The service sector employed the largest share of workers in 2021, accounting for approximately 71.12 percent of all employees;
  • The services sector's share in Germany's GDP was 69.3% in 2022.
 
Our lawyers in Germany will offer you details about all types of companies and their advantages. You can also contact us if you need legal assistance in setting up a company in Germany and in registering a trademark in this country.