If you as a founder have a business idea with which you would like to go into self-employment “alone”, there are essentially two options. You can either make use of the so-called “one-person corporation”, such as a:
- “one-person GmbH”,
- “one-person UG”,
- “one-person GmbH & Co. KG” or
- “one-person UG & Co. KG”.
Or you can use the so-called “sole proprietorship” to start your own business.
The sole proprietorship is the most popular form of business!
In Germany, the sole proprietorship is the most popular legal form. Around 79% of all founders start their self-employment with this legal form, especially because companies often start as small businesses. This is due to the fact that many founders, as beginners, do not give much thought to the legal status of their self-employment. Often a business is registered and then, for example, a shop is opened, thus automatically paving the way for a sole proprietorship. Only then is the step to the UG or GmbH taken.
The three types of sole proprietorship:
There are three types of sole proprietorship: merchant, freelancer and farmer. The individual self-employed person’s ultimate classification depends on the business in which they are engaged.
In principle, any trader can be a merchant. An organisation is deemed to be a trading organisation if the purpose of the activity is to manufacture goods, sell products or provide services, not by itself but mainly as an intermediary. These include, for example, retailers, craft businesses and brokers.
Traders are primarily distinguished according to whether the trade requires a commercial organisation or not. If so, the term “actual or full trader” is used. Otherwise, the term “small trader” is used. In practice, most sole proprietors start as small business owners, as this does not require significant organisation, extensive bookkeeping, structural personnel planning or entry into the commercial register.
When your business is entered into the commercial register, its name receives the suffix “eingetragener Kaufmann (e.K.)” (registered trader), which is particularly popular for representative purposes. However, this registration is accompanied by obligations such as commercial accounting.
If your business operations then reach a scope that requires a commercial organisation, you will automatically become a full merchant. This brings with it a number of obligations, such as entry into the commercial register and preparation of balance sheets in accordance with the provisions of the Handelsgesetzbuch (German Commercial Code).
A freelancer has clear advantages over a commercial trader. These advantages include the fact that as a freelancer you do not need to register a business and therefore do not have to pay trade tax. In addition, you as a freelancer have the option of merging with other freelancers by forming a partnership company. Who counts as a freelancer is determined by various laws, whereby the area of freelancers is not conclusively regulated. Rather, special professional qualifications or talents of an artistic nature and the autonomous and professionally independent provision of higher-level services (such as lawyers and architects) serve as the basis for the status of freelancer.
As a farmer, you do not carry on a trade within the meaning of the trade regulations and are not a merchant. The occupation of farmer is a recognised skilled occupation that involves the production of plant or animal products on a cultivated area (for example, animal husbandry, horticulture and viticulture, or agriculture and forestry). This type of business may sell products without registering a trade.
Sole proprietorship leads to private liability
Forming a sole proprietorship establishes private liability on the part of the founder for the company’s debts that arise in the course of business. In contrast to a UG or GmbH, the founder of a sole proprietorship does not enjoy any release from personal liability or reduction in risk.
Forming a sole proprietorship without initial contribution
The sole proprietorship does not require an initial contribution. Rather, you run it with your own private capital.
The sole proprietorship is not a legal person
The sole proprietorship is “identical” to you. You are fully liable to cover its liabilities with your private assets.
Your responsibility for managing the sole proprietorship
You are responsible for managing the sole proprietorship. Like the GmbH or UG, it is not possible to practically exempt oneself from liability by appointing an external managing director.