The most important facts in brief:
The choice of legal form has far-reaching effects on various aspects of a company - including liability, the required start-up capital, external impact and investment opportunities for investors.
In Germany, the sole proprietorship is the most frequently chosen legal form, followed by the GmbH.
The tax burden is also significantly influenced by the legal form.
Procedure:
Clarify whether the company is to be founded alone or together with others.
Draw up a long-term plan: Where do you want the company to be in five or ten years? The legal form should match the company's objectives.
Obtain information on relevant criteria such as liability, start-up capital, tax burden and administrative costs.
Analyse successful companies with a similar business model and check their legal form.
If you are unsure, seek expert advice on choosing the right legal form.
After deciding on a legal form, register the company - depending on the legal form, for example with the tax office, trade office, commercial register, chamber of industry and commerce or the employers' liability insurance association.
Sole proprietorship as the legal form for setting up a business
From a bureaucratic point of view, the legal form of a sole proprietorship is considered the simplest form of company formation. Registration with the tax office is required. Sole proprietors are, for example, tradespeople, freelancers or farmers and foresters.
Trade
Tradespeople often manage their business independently and operate as sole proprietorships. One advantage of this legal form is the unrestricted freedom to make decisions without being accountable to third parties. The disadvantage is the personal, unlimited liability.
The sole proprietorship is an attractive option for founders who are willing to take risks. If, on the other hand, you are looking for security, you should consider founding a corporation.
Liberal professions (freelancers)
Freelance activities can also be carried out in the form of a sole proprietorship. This gives you full freedom of choice, but also unlimited liability with your private assets.
If sufficient share capital is available, the formation of a GmbH can be a sensible alternative in order to minimise personal risk.
Taxes in a sole proprietorship
A sole proprietorship is subject to three types of tax: income tax, trade tax and VAT. However, there are exceptions. Trade tax does not apply to freelance activities.
By applying the small business regulation, there is also no VAT liability. This enables more favourable prices compared to the competition, especially for customers from the private sector.
An overview of business forms & criteria
Criteria | Sole proprietorship (commercial) | Sole proprietorship (freelance) | GmbH | GbR | UG |
Minimum capital | 0 € | 0 € | 25.000 € | 0 € | 1 € |
Individual foundation possible | ✅ | ✅ | ✅ | ❌ | ✅ |
Personal liability | ✅ | ✅ | ❌ | ✅ | ❌ |
Income tax | ✅ | ✅ | ❌ | ✅ | ❌ |
Trade tax | ✅ | ❌ | ✅ | ✅ | ✅ |
Small business regulation possible | ✅ | ✅ | ✅ | ✅ | ✅ |
Business account legally required | ❌ | ❌ | ✅ | ✅ | ✅ |
Around 70% of German companies are run as sole proprietorships (e.g. as freelancers, tradespeople or merchants), making them by far the most popular legal form. This is followed by the GmbH (limited liability company) at around 15% and the GbR (civil-law partnership) at 5%.
Overview of the most common legal forms:
Category | Legal forms |
Sole proprietorships | - Registered trader - Freelance or commercial self-employed individual |
Corporations | - Limited liability company (GmbH) - GmbH & Co KG - Public limited company (AG) - Partnership limited by shares (KGaA) - Entrepreneurial company (UG) |
Partnerships | - Partnership under civil law (GbR) - Limited partnership (KG) - General partnership (OHG) - Partnership company (PartG) - Partnership company with limited professional liability (PartG mbB) |
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