Sole proprietorship: Founding, liability, legal form, management & taxes
Sole proprietorship (EU) – The sole proprietorship is a German legal form which – as the name suggests – is founded and managed by a single person. This includes freelancers, small businesses and registered traders. Would you like to set up your own business and learn more about “forms of business law and the real estate industry”? Then you’ve come to the right place! Below you will find out everything you need to know about setting up a sole proprietorship. How do you become a sole trader? What are the differences between freelancers, small businesses and registered traders? What are the advantages? What are the disadvantages? How do I set up a company? What is a company? You will find answers to all these questions and more – explained simply and quickly. Plus everything you need to know about taxes in Germany and real estate trading. Back to all: Legal forms.
Sole proprietorship: formation, advantages and disadvantages
If you are considering setting up a sole proprietorship, the first thing you need to know is about the start-up process: Who can set up what exactly, when, to how many… what are the differences and similarities between the various sole proprietorships? It is equally important for you to know the advantages and disadvantages of sole proprietorships: From profit distribution to saving taxes – an overview of the seven most important decision criteria for you.
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What are the decision criteria?
- Number of shareholders
- Management
- Foundation
- Company name
- Financing
- Liability
- Profit distribution
Sole proprietorship: Quick and easy to set up on your own
In the entrepreneurial world, there are many different types of companies to choose from. They are roughly divided into two categories, namely sole proprietorships and companies, which in turn are divided into incomplete companies – including dormant companies and BGB companies – and complete companies – partnerships, corporations and some more.
The sole proprietorship – or sole proprietorship for short – is the simplest German legal form for setting up a business, as basically anyone can set up their own business as a sole proprietor without much effort. In contrast to setting up a partnership or corporation, you do not need any other founding members and the framework conditions are clear and easy to understand.
Overview: Freelancers, small businesses and registered traders
If you want to set up a sole proprietorship, there are various legal forms for you to choose from: You can either set up your own business as a freelancer, become a small business owner or join the ranks of tradespeople. In each case, you are the sole founder of the company and also take over the management. However, there are also differences between the three legal forms that you should be aware of so that you can make an informed decision about the type of company that is best suited to you and your plans before you become self-employed.
- Freelancer
- Small traders
- Registered merchants (e. K.)
Similarities and differences briefly explained
As a sole proprietor, you are your own boss: you are the founder, shareholder and managing director at the same time and can set up your sole proprietorship entirely according to your wishes. It doesn’t matter which legal form you ultimately choose. There are also no differences between the individual company forms in terms of financing, liability and profit distribution. Only the start-up process and the plans for the company name vary depending on whether you decide to be self-employed as a freelancer, a small business owner or a businessman or businesswoman.
Financing is entirely at your discretion, so you can theoretically do without any start-up capital at all. However, it is advisable to have certain reserves and to draw up a financing plan so that you are financially prepared in the event of unpleasant surprises. The business risk is always borne by the sole trader and if something goes wrong, you are not only liable with your business assets, but also privately! What’s more, your profits are 100% yours and you don’t have to share them with anyone.
Option 1: Formation & company name – freelancer
As a freelancer in particular, the start-up process is quick and easy: all you need is a tax identification number – or tax ID for short – which you can apply for from the tax office responsible for your administrative area. You can then register your self-employment and get started straight away.
Since you are not entered in the commercial register as a freelancer, you cannot officially trade as a company. This means that your company does not have a company name, but merely a business name. The company name is made up of the owner’s full name and can be expanded to include the sector, for example. The chosen company name must clearly indicate which services you offer as a freelancer. An individual name can be given by using a business name, which is more or less the figurehead of your sole proprietorship.
Variant 2: Formation & company name – small traders
Even as a small business owner, it is relatively easy to set up your own company: Firstly, like freelancers, you need your own tax identification number from the tax office, and secondly, you have to register your small business with the relevant trade office for a small fee – usually between €10 and €65. Optionally, you can also have yourself entered in the commercial register, which involves additional costs. According to the German Commercial Code (HGB), you then count as a so-called “Kann-Kaufmann”, otherwise as a “Nicht-Kaufmann”. Both have advantages and disadvantages, which is why you should consider this decision carefully.
As a non-merchant, the same requirements apply to you as for freelancers: Your company name must therefore consist of at least your full first name and your surname and can optionally be supplemented by an industry name or even an invented name.
Variant 3: Formation & company name – traders (e. K.)
The strictest requirements apply to traders when it comes to setting up a business: in addition to applying for a tax identification number (tax ID) from your tax office and registering your business with the trade office, you are also required to have a notary make an entry in the commercial register. For a cost of around 200 to 300 euros, this will secure you the title of merchant. Only once you have completed this public registration will you have your own company in the legal sense.
You are free to choose the type of company name in many respects, but it must provide information about your commercial status and also be distinctive from the companies of other traders. You can form a personal company that describes you as the owner in more detail, or a material company that reveals more about your business purpose and the associated services, or even an imaginary company… It is mandatory that you add the gender-neutral suffix “e. K.” – or alternatively “e. Kfr.” for registered businesswomen or “e. Kfm.” for registered businessmen – to the liability relationships of your sole proprietorship. You can also consider registering your company and/or your business name as a trademark to protect your name or your company.
You can find more information about the registered merchants here:
Advantages: Own decisions, no profit sharing, low taxes
After the presentation of the three common sole proprietorships, you have probably already recognized the advantages that these legal forms offer you: Setting up a business is relatively straightforward and you don’t need any start-up capital. In addition, all profits flow directly into your own pocket without major tax deductions – you can easily offset any losses with other income. Perhaps the most important pro: you are your own boss and don’t have to coordinate your decisions with other shareholders or managing directors: Your business figures stay with you – you are not obliged to make any disclosures.
- Fast and uncomplicated foundation
- No start-up capital required
- Profit inflow 100%
- Low tax levies
- Loss compensation through other income
- Own decisions without coordination with others
- No disclosure of business figures
Disadvantages: Sole responsibility, no advice, full liability
The disadvantages of setting up a sole proprietorship are also easy to pinpoint: Firstly, as a managing director, you are on your own for all decisions: You don’t have a partner, a founding team or a staff of shareholders to advise you. Secondly, you are fully and unreservedly liable for every wrong decision and every financial loss – both commercially and privately. Thirdly, it is up to you to build up your equity capital and thus create more financial security for your sole proprietorship.
- Sole responsibility
- No advice from others
- Full liability
- Sole expansion of equity
Evaluation: Form-free & flexible for lone fighters
After comparing the advantages and disadvantages, the following emerges: if you would describe yourself as a typical lone fighter and like to make decisions independently in order to reap the rewards of your entrepreneurial work yourself, a sole proprietorship is probably just the right thing for you! The freedom of form and flexibility in terms of financing make sole proprietorships an attractive legal form for start-ups and beginners who want to get off to an uncomplicated start and achieve a lot without a lot of capital.
Real estate sole proprietorship
If you want to gain a foothold in the real estate industry, setting up a sole proprietorship could be of interest to you: many real estate agents have set up their own business in this way and are covered by financial loss liability insurance, for example. You too can set up a sole proprietorship for real estate without any major problems. Until your sales volume reaches the “100,000 euro” threshold, you can conduct your real estate business either as a freelancer or small business owner. This is usually followed by entry in the commercial register and you switch to the legal form of a registered trader.
Starting a real estate business without start-up capital
A sole proprietorship in the real estate industry is particularly worthwhile if you are just starting out and want to get a taste of the real estate world. Although you don’t have any great tax advantages as a sole proprietor, you don’t have to have a huge amount of start-up capital ready, as is the case when setting up a limited liability company (GmbH), for example. You can also clearly separate income from renting and leasing from the profits from your business.
With “Fix & Flip” strategy to the real estate GmbH
With the “fix and flip” strategy, you can buy, upgrade and resell properties, among other things, to quickly build up your capital. Apart from a certain financial basis to be able to buy a house or apartment in need of renovation in the first place, you will probably need the help of a competent tax advisor to get started… but with a healthy trading margin of 20% to 30% and a year or two’s work, you can certainly expand your real estate business quickly and convert your sole proprietorship into a limited company.
Taxes for sole traders: income tax, VAT & trade tax
As a sole trader, you need to know about certain types of tax, because when you set up your business, you will receive income from your trade or freelance work. Tax law stipulates that in addition to income tax, which you are no doubt already familiar with from previous employment relationships, you will also have to pay VAT and – with the exception of freelancers – trade tax.
- Income tax (ESt)
- Value added tax (VAT)
- Trade tax (GewSt), if applicable
You can find out what taxes you can expect from a real estate stock corporation here:
Conclusion: Sole proprietorship – for whom is it worthwhile?
If you are prepared to take a manageable risk in order to start your own business quickly and easily, you do not need enormous financial reserves and also pay relatively little tax on your profits. A sole proprietorship is therefore ideal for young entrepreneurs who want to take their lives into their own hands, don’t just dream of self-realization and don’t want to wait until they have saved up enough start-up capital.
From a real estate business perspective, a sole proprietorship is particularly worthwhile for beginners who would prefer to invest their capital directly in the purchase of real estate instead of investing the share capital in a corporation. If you are successful, however, you should consider joining forces with other sole proprietors, either as a special-purpose civil law partnership (GbR) or directly as a corporation.
You can find out more about the civil law partnership (GbR) here:
Comparison: Sole proprietorship, one-man GmbH, small AG or entrepreneurial company?
If you are planning to set up your business on your own, you can choose between different legal forms of business: On the one hand, there is the classic sole proprietorship, where you act as a freelancer or registered trader or set up a small business. Alternatively, you can choose between the one-man GmbH and the entrepreneurial company – often referred to as a “mini-GmbH” – or set up a small public limited company.
You can find out more about the different legal forms for solo founders here:
- One-man GmbH – see GmbH
- Entrepreneurial company / UG (limited liability)
- Small stock corporation – see AG
Sole proprietorship & one-person GmbH
Basically, there is not much difference between the two legal forms of a sole proprietorship and a one-person company, as in both cases you are the sole shareholder with sole management authority and sole power of representation. However, the decisive difference is in the form of liability: as a registered businessman (e. Kfm.) you have unlimited, direct and joint and several liability – as the sole shareholder of a one-person GmbH, on the other hand, you are only liable for the business up to the amount of your capital contribution.
Are you also a sole proprietor and no longer want to bear the enormous liability risk? Then you should think about converting your sole proprietorship into a one-person GmbH. The change of legal form is easy, but can make a huge difference in the event of losses! To avoid personal liability, as part of the registered merchants (e. K.), you only need a notarized certificate confirming that your business has a value of at least 25,000 euros and submit this to the commercial register together with the opening balance sheet. The sole proprietorship is practically transferred to the GmbH as a contribution in kind.
Entrepreneurial company & small stock corporation
Alternatively, you can consider setting up an entrepreneurial company (UG). Often referred to as a “small GmbH” or “mini-GmbH”, this legal form of company is a sub-form of the conventional limited liability company, but in contrast to the “normal” GmbH, it only requires a single euro as share capital. It is therefore particularly attractive for solo founders who do not have 25,500 euros in their bank account. However, without the share capital of a GmbH, your image with banks could be lower and your chances of getting a good loan could decrease.
The so-called “small AG” is primarily intended for individuals who want to keep their stock corporation within a small group of people. Apart from the individual shareholder, who also assumes the role of the Management Board, only three other persons are required to be appointed as members of the Supervisory Board. However, the formation of a public limited company, regardless of its size, is very complex and more cost-intensive than the other common forms of company law. For this reason, a one-person GmbH or an entrepreneurial company may be more suitable if you are planning to set up your company alone. Alternatively, you may also consider setting up a sole proprietorship.
Learn for free: Founding a company & legal forms
In addition to sole proprietorships, there are a few other alternative types of companies that could be of interest to you as a founder! Want to learn more about starting a business? Learn more about share capital, taxes and the individual advantages and disadvantages of the different types of companies.
Here you will find all the legal forms you can choose as a founder in Germany and a guide with a checklist:
- Legal forms: List
- Founding a company: Procedure, costs and overview
Legal forms: List
Legal forms – What types of company are there? If you want to set up your first company, choosing the ideal legal form is one of the first steps in the company formation process. Whether it’s a special real estate company or the establishment of a start-up, I have summarized all types of companies in Germany for you here.
Company types in detail:
- Registered merchant (e. K.)
- Company under civil law (GbR)
- General partnership (OHG)
- Limited partnership (KG)
- Entrepreneurial company (UG)
- GmbH: limited liability company
- Real estate GmbH / asset management GmbH
- Public limited company (AG)
- Real estate stock corporation (REIT-AG)
- Societas Europaea (SE)
- Foundation / Family foundation
Founding a company: Procedure, costs and checklist
Founding a company (real estate) – Do you want to found your first company? Requirements for you as a founder, share capital, shareholder agreements, start-up costs, legal forms and checklists. It sounds complicated for beginners, but it’s actually quite simple. The process of setting up a company is usually relatively the same. I have summarized the founding process for you here in simple steps. Learn how to set up your own company. After the big guide to all legal forms and types of company, today I’m taking a detailed look at setting up a (real estate) company for beginners.