For you to the overview
- What is a sole proprietorship? (Individual company definition)
- What is the right legal form for a sole proprietorship?
- What is the liability of a sole proprietorship?
- Starting a sole proprietorship – How do I become a sole proprietor?
- How do I finance my sole proprietorship?
- What taxes does my sole proprietorship have to pay?
- As a sole trader, do I work best from home?
- Is a sole proprietorship in the commercial register?
- Founding of a sole proprietorship: legal form, liability and taxes in comparison
- Which company name can I choose for a single company?
What is a sole proprietorship? (Individual company definition)
The question of what a sole proprietorship is is simply explained. Or not. (Super Introduction, Felix)
Because in principle there is no concrete legal definition for the term “sole proprietorship”. (And that’s always the case.) Many such companies are founded and run by one individual.
The sole proprietor either acts as a self-employed person or is a registered businessman or registered business woman. It should be noted that according to the wording and a registered businessman is actually a sole proprietorship. Stupidly said: You lead a company alone – therefore also “individually”.
A sole proprietor owns his business all by himself and he is responsible for this independently. This can be both an advantage and a disadvantage. (I think that’s always the case if you’re responsible for something on your own.)
Because that also means that the sole proprietor, in the event that his sole proprietorship fails, can be held accountable alone. However, the risk of personal liability, in particular liability of private assets, can be reduced by the chosen legal form .
You will learn more about the legal forms of sole proprietorship. (One of the most common questions.) What is the definition for a sole proprietorship?
As already mentioned, the concept of a sole proprietorship is not regulated by law. Basically, any business founded by an individual is a sole proprietorship. This means that the founder founds and registers the sole proprietorship and waives the appointment of a director or other members.
This means both great freedom and immense responsibility, because you have to make all the important decisions in the individual company and at the same time keep your head high on mistakes. (It’s really important to me that you realize this.)
What is the right legal form for a sole proprietorship?
In principle, every natural person can start a sole proprietorship . (By the way, you are a natural person.) If you are interested in such a foundation, you should think in advance about the legal form and the financing .
As mentioned above, there are a variety of legal forms that you can choose to start your own business. (Do not worry, I’ll help you here.)
Therefore, it is important that you familiarize yourself with the advantages and disadvantages of each variant of a sole proprietorship at the beginning.
If you want to run your business as a small business or as a freelancer, be aware that the risk of personal liability is quite high. (In the worst case, someone comes to pick up the TV at home.)
If you run your sole proprietorship as a small business, merchant or freelancer, that’s exactly what it is. With these legal forms of the individual enterprise you stick with your personal fortune. (If you’re wondering what that’s all about again – do not worry, answer will follow.)
If you want to be more secure and minimize the risk of personal liability when setting up your sole proprietorship, it is better to start the path to self-employment with the help of a corporation.
In this case, you can choose between two options and register your individual company as a UG or 1-person GmbH. (Here, too, you are alone in the ring.) There is also the possibility of a small AG, a mini-AG quasi, but which is used in the rarest cases for the establishment of individual companies.
With these 3 options, you are subject to limited liability and are not liable for your private assets.
The graphic below shows which decision criteria can play a role and which alternatives exist. Again summarized:
- small businesses
- Registered merchant
- 1-person GmbH
- 1-person UG
Of these, the first three partnerships and the last two corporations.
If you would like to learn more about self-employment , then read on behind the link.
What is the liability of a sole proprietorship?
The liability within your individual company depends on the respective legal form. (see the previous section.) One of the key differentiators that you should be aware of is whether you want to stick with your private fortune or not . (Of course, you’ll say, “No, I do not want that.” But giving up on liability goes hand in hand with more effort.)
The freelancer, small business owner or businessman always has the risk of personal liability or liability with his private assets.
However, if you want to set up a sole proprietorship in the form of an entrepreneurial company (UG), a limited liability company or a small AG, there is the risk that you have to stick with your private assets, not. In fact, most such individualized corporations would not, however, designate themselves as sole proprietors.
If you would like to know more about legal pitfalls, then click here .
I would like to give you a little tip on the topic of liability for sole proprietorship at this point: in all cases you need an imprint for your website. Here you will find a generator that creates the imprint for your individual company . So do not think: I’m out of liability and can run comfortably through the world.
Starting a sole proprietorship – How do I become a sole proprietor?
In order to successfully start a sole proprietorship, you first have to think about a few fundamental questions.
Among other things, you should clarify whether you want to make a distinction between the sole proprietor and the CEO. The financing should also be well thought out in advance. Are there any loans that need to be granted before you start your own business ?
Frequently, individual companies are registered as small businesses or in the context of a freelance activity. (This is the most chosen legal form.) If you opt for this legal form, the registration is really simple:
Start as a small business owner:
Quite simply you have to register a trade. To do this you go to your competent trade office and register the trade locally. Sometimes you have to make an appointment and sometimes you can even do it online. (Yes, communities often take a bit longer to digitize.)
Start as a freelancer:
Freelancers do not have to register a trade and only report their activity to the responsible tax office. In addition you get yourself the questionnaire for the fiscal registration and contribute everything accordingly. Then you will be given a tax number with which you can start.
How do I finance my sole proprietorship?
If you want to get started as a sole trader, you should consider the financing of the foundation early on. In principle, each founder can decide for himself how much starting capital he estimates for its foundation.
However, if you are dependent on investors or a loan for your sole proprietorship, then you must deal with the requirements for the respective promotion on time. If you would like to know more about how to win a business angel for you, click here .
There are many different ways to get financial support. The question that needs to be answered first is whether you want to get money from others for your sole proprietorship or go to your own reserves?
Let’s start with self-financing. If you have saved your own reserves and start with a degree of certainty in your independence, you can endure through economic management long, until the first profits einroll.
It does not always have to be a loan for starting a sole proprietorship
Bootstrapping means financing by own capital and not by external means.
You are working with a very tight budget and scarce resources. The goal is to keep the operating costs of your individual company as low as possible and to quickly achieve a positive cash flow.
You can rely on profits and reserves. Own financial services have a certain security with banks even more advantages.
Of course, if it’s your own money, you’re more motivated to turn it into profit. Since you start with scarce resources, your work and planning process should be clearly structured.
Ultimately, the biggest advantage of this type of financing is that almost all of the shares remain with the founder and thus create great freedom for you.
However, own financing also means a lot of pressure, because it is your own, hard-earned money at stake. In addition, you are on your own and can not easily rely on know-how from external sources such as your investors. This can of course lead to wrong decisions, but that does not mean your ruin.
Many an idea to set up a sole proprietorship easily exceeds the financial reserves and a small cash injection must serve.
The funds seem endless here. From normal loans or loans at the bank via crowdfunding to state subsidies. That raises the question of which financing is the most favorable for you. Let’s go through one by one.
Family and friends
Who is interested in being well and avoiding financial hardship? Exactly, the people closest to you. The nice thing about family members is that they stand up for you and probably ask for no or no high interest on the borrowed money.
This is not to say that you should take the borrowed money for granted, handle it responsibly and show them that it makes sense to use your sole proprietorship. Because even if your friends and relatives appreciate you, it does not mean that they do not want their money back sometime.
The benefits are obvious: you do not have to torment yourself through tough bank or investor talks.
The money is usually available faster and having family members or friends as investors is certainly also enjoyable. However, there are also considerable disadvantages: the sum of the money to be lent heavily depends on the financial capacity of your environment.
Not everyone has the opportunity to ask relatives and friends for money because it simply does not exist. In addition, situations have arisen in which such forms of financing have seriously damaged friendships or relationships.
Money sometimes ruins friendship. It is all the more important that you handle the money properly and treat it like your own!
Debt financing: loan from the bank
Loans and loans from banks are one of the most common ways to secure money for start-ups. In the best cases, a loan is set up over a certain period of time after submission of a meaningful business plan.
Again, there are many advantages and disadvantages. On the one hand, the bank is not interested in company shares. That means you remain the master or wife of your own company. The disadvantages are above all the own liability.
Banks want to have security in the form of reserves, profit distributions and the like. Often you are attached to your private wealth. But hardly a founder can have this kind of collateral at the beginning of his existence, which is why it often comes to difficulties in borrowing.
Especially founders with innovative ideas or products that have not yet proven their marketability, have particular difficulty with a positive feedback from a consultation to go out.
These options are the most popular ones to cover the costs of your sole proprietorship. In addition, the federal and state funding programs, the start-up grant from the Employment Agency, Innovation Accelerator, scholarships, competitions and crowdfunding for funding are also eligible. Even a business angel or venture capital can help you to a successful start.
After you have clarified the financing, you must register your sole proprietorship before you can start your activities. Every sole proprietor or managing director of a partnership or corporation must register with the competent trade office.
Each trader is subject to the immediate duty to report according to § 14 of the Trade Regulation (GewO). This is to be done in the city where the self-employment is carried out and / or the office space is located.
When moving, the trade must be re-registered accordingly. In general, the registration must be done in person, but some commercial offices also allow the registration, re-registration or deregistration by mail. Inform yourself on respective homepage.
This means that if your sole proprietorship is a business enterprise (ie small business, UG, 1-Personen-GmbH or you work as a merchant), you have to register for it with the Gewerbeamt. There you will receive a trade license for your sole proprietorship.
If you do not start your sole proprietorship as a registered businessman or as a trade, you are working as a freelancer and do not have to register yourself in the trade license. In this case, it is sufficient to state your activity informally at the tax office.
Here’s a detailed guide on how to do it to sign up for your trade.
What taxes does my sole proprietorship have to pay?
Also, the type of taxes you have to pay as a sole trader, depending on the legal form are made differences. (Do not worry, I’ll help you.) In general, the following taxes may apply:
- income tax
- income tax
- value added tax
- business tax
Yes, I’m sorry. 🙂 Unfortunately we live in the land of taxes.
But first from the beginning: After successful business registration you will receive the tax registration form from the tax office.
With it you request your tax number for your sole proprietorship. (As a freelancer, you have already done that before.) Responsible is the tax office, in whose district the offices fall. If you work from home, so your residence tax office.
Here all details of the individual enterprise are registered as well as an estimate of the future conversion and the profit for the current and the coming year.
Based on these figures, your tax office is responsible for all future quarterly income tax prepayments (for corporation tax prepayments) and, if necessary, trade tax prepayments.
Therefore, not too high amounts should be entered here, because this reduces the liquidity. Also, all important information on sales tax will be made here. Errors in the entry form can be corrected, but it is better to talk to a tax adviser before filing with the tax office.
“Ok Felix, but what do I have to pay now?” Jas, you’re right. Info comes:
Trade tax: You pay from a profit of 24,500 euros. This applies to all the above legal forms, except for the freelancer. If you want to know more: Business tax info .
Income tax: You probably already know that. Your taxable income is subject to income tax per year. As a rule, you pay the income tax – as you know it from the electricity contributions and at the end of the year, these prepayments are offset against the real revenue and you have to pay or get something back. (For all legal forms)
PAYE TAX: If you have employees, depending on the type of employment payroll tax will apply. You might even know that yourself when you were employed. (For all legal forms)
Corporate Tax: The corporate income tax rate is 15 percent. More information here . The corporate tax applies to all corporations – ie the UG, the GmbH and the AG.
Sales tax: Unless you use the small business rules, you will pay VAT on your invoices. Your sales tax receipts are offset against the expenses and the difference you pay to the tax office or just get something back.
A common mistake that taxpayers make when it comes to VAT concerns VAT. Not infrequently, tax types are mixed. Value Added Tax taxes the exchange of services, which is always done and therefore always demands taxes.
Unfortunately, individual companies often make the mistake of thinking that their planned sales are not taxable. In general, all intra-German sales are taxable, but there may be exemptions depending on the type of sales. According to the benefit type, the VAT rate is also determined, in Germany either 7% or 19%. Incorrect information in the tax registration form can become expensive after a tax audit by the tax office.
The topic of small business regulation is also a topic of VAT. A cross in the entry sheet at this point means that although the sales of your sole proprietorship can be subject to VAT, the amount of the “Small Business Entrepreneur” relief will be used.
Accordingly, your sales in the first year may not exceed € 17,500 gross (Attention: Proportional to calculate at the beginning of the year) and in the second year 50,000 €. In this case, you will not have to declare sales tax on your invoices and will not submit any advance sales tax returns (usually monthly for founders) and sales tax returns.
As you can see, the sources of error for misjudgments, mispredicted invoices and incorrect sales tax filing are high.
It is important that as the founder, who you are now as sole proprietor, you are aware that you are now responsible for paying your income tax.
If you were previously employed, your employer has always calculated your personal income tax and paid it to the tax office on a monthly basis (this is only payroll tax). As an independent sole trader, your new income tax payment will be collected quarterly by the tax office and calculated on the basis of the tax entry sheet.
The advance payments can also be subsequently adjusted up or down. You also have to pay income tax if you are a small business owner.
Of course, it will take some time for your sole proprietorship to make a profit, but you should also think about profit distribution early enough.
In addition, you will learn to delegate certain tasks. For example, a good accountant and an excellent accountant are essential if you want to succeed in your own business.
As a sole trader, do I work best from home?
If you run your sole proprietorship from home, in this video you’ll find helpful tips on how to get the most out of your entrepreneurship from home and be productive:
Is a sole proprietorship in the commercial register?
Whether you have to register your sole proprietorship in the commercial register depends on the legal form you choose for the foundation. As a freelancer or as a small business owner, it is not necessary that you register yourself in the commercial register.
However, if you want to establish a 1-person GmbH, a UG or settle as a merchant, you must make an entry in the commercial register. The cost of registering your sole proprietorship varies depending on your legal form. In principle, however, the costs amount to between 200 and 300 euros.
Founding of a sole proprietorship: legal form, liability and taxes in comparison
Once again, I have given you a brief overview of the legal form and effects of business registration and other factors in the hope that this will help you.
Which company name can I choose for a single company?
Nomen est omen, it is well-known in common usage. This applies in particular to the name of your individual company.
However, most companies are listed under the natural name of the person who created them. If there is an entry in the commercial register, it is also possible to give your individual company a company name under which it is listed and managed.
That would be the case with a registered merchant. It is still disputed whether the company may carry a fictitious brand name. It is important that you give the actual owner of the company on all documents.
Which name you choose for your individual company also depends on the respective legal form. For example, your imagination in naming as small entrepreneurs or freelancers clear boundaries imposed.
Therefore, you do not have too much room for maneuver, as the sole proprietor must clearly emerge from the name of his founded company.
However, name additions are possible as a businessman or the foundation of a 1-person GmbH.
Tradespeople and freelancers enter the market with their personal names (eg Felix Thönnessen). UGs, GmbHs and Ags can also choose a fictitious name (eg Aviantoma GmbH). It is somewhat debatable whether traders or freelancers with a brand name may act on the market in addition to their own.
All in all, there are a variety of variations if you want to start a sole proprietorship and several different and multi-faceted embodiments.
The step to start a sole proprietorship is a very brave one, but it will also bring you closer to your personal dreams and goals. Do not let legal issues stop you once you understand it, then it’s not that hard. I hope my article helped you a bit.
Are you missing an info? Do you want to know more? Let me know.