Sole Proprietorship in Germany: Complete Guide

Germany is known for its business across several domains and different industries. With a growing liking for foreigners to expand into the German markets as sole proprietors, a sole proprietorship in Germany has become one of the most popular forms of legally establishing a business. Setting a sole proprietorship in Germany has the benefits of cost-effective formation, relatively easy-to-understand laws, and one of the best business infrastructures.

Apart from that, Germany is known to be a popular business destination for foreign investors to invest in German-based businesses due to 

• Reliable infrastructure
• Positive social climate
• Stable legal environment 
• Highly skilled workforce, and 
• Unmatched research and development 

Germany is an economy known for entrepreneurs starting a business, expanding their operations, or employing skilled and educated talent due to legal regulations that make conducting business in Germany easy. This makes establishing a sole proprietorship in Germany one of the most favorable business entities. 

Therefore, it is essential to understand everything about setting up a sole proprietorship in Germany.

Read more to learn about incorporating a sole proprietorship in Germany.

A sole proprietorship is one of Germany’s most common forms of business entity. 

There are a few key requirements to become a sole proprietor in Germany that include — 

• You must be of legal age of 18 
• Registration of your business with the trade office is mandatory.
• You must be of a sound mindset to be able to establish your business.
• A sole proprietor in Germany can be a freelancer, a small business, or a commercial enterprise. 
• You must not have been blacklisted or banned from practicing the profession you intend to set up a business.

Considering it is one of the most common forms of business entities, establishing a sole proprietorship in Germany has certain benefits. 

• The registration process of a sole proprietorship is relatively simple.
• The cost of setting up a sole proprietorship in Germany is lower than in other business entities.
• The sole proprietor bears all profits and losses.
• Managing and controlling the business operations are efficient.
• Germany’s sole proprietor can change the enterprise’s legal status when they are ready to expand.

As per the German Commercial Code, a few documents are required to register your business. These documents include — 

• Identification documents or national identity (for example, a passport)
• Registration certificate (Meldebescheinigung)
• Residence visa for a foreign national or a permanent visa for a foreign national residing in Germany for more than three years
• Application form 
• Special licenses for certain industries include providing a master craftsman’s certificate, police clearance certificate, and health certificates.
• Bank account details for the business

A few other criteria that must be ensured during the registration process of a sole proprietorship in Germany include — 

• Two major laws govern the sole proprietorship, the Commercial Code (alternatively known as Handelsgesetzbuch – HGB)* and the Civil Code (alternatively known as The Bürgerliches Gesetzbuch – BGB) **.
• Specific industries require special licenses to run operations. Special licenses include 

• License for cross-border financial institutions for a foreign financial institution setting up a sole proprietorship in Germany
• Banking license if a sole proprietorship is a bank
• Gambling license
• To obtain special licenses, the sole proprietor must 

• Pay the trade license fee to the respective municipality
• Complete the application form
• Provide identification documents and details
• The sole proprietor must also bring the registration certificate of the business.

* Handelsgesetzbuch (HGB) is a German law that governs and regulates the commercial code for all companies in Germany. It acts as a German commercial code and accounting standards that businesses must comply with when preparing and reporting financial statements. 

** The Bürgerliches Gesetzbuch (BGB) is the German civil code that governs all criminal and business frauds.

To register as a sole proprietorship in Germany, several processes depend on if you are a 

• Small business 
• Freelancer, or 
• Commercial enterprise

In small business cases, registering a sole proprietorship with the trade office is mandatory. The trade office will then notify the German tax authorities on your behalf. You will then receive a tax form that must be filled out and submitted to the jurisdictional tax authorities, who will process your business. 

Freelancers must register directly with the German tax authorities with the tax form that must be filled out and submitted on time. Freelancers are also considered sole proprietors as they are ‘self-employed.’ 

In the case of commercial enterprises, they must be entered into the commercial register via a notary method and registered with the trade office. However, several enterprises or companies will have to register with the German Chamber of Commerce to be sole proprietors.

It is important to note that the Business Licensing Office differs based on different German cities.

A sole proprietorship in Germany is taxed on their worldwide income. The taxes applicable on income earned include

• Value-added tax 
• Corporate income tax 
• Solidarity surcharge 
• Local business tax

The value-added tax in Germany is at a flat rate of 19% and a reduced rate of 7% for certain goods and services such as hotel accommodation, books, food, entertainment, etc. 

Corporate income tax in Germany is levied at a flat rate of 15% and a solidarity surcharge of 5.5%.

The German tax authorities levied the trade tax rates at 3.5% (base rate) and municipal tax rate, depending on the location of the business.

Although opening a sole proprietorship in Germany is relatively easy, you must be aware of the German laws on sole proprietorship.  Setting up a sole proprietorship in Germany can seem daunting, especially expats looking to expand into a highly regulated market; you must understand the regulations for enterprises.

This is where partnering with an Employment intermediary platform such as Multiplier can help. We manage your employees in Germany through various functions such as onboarding, employee benefits, employee insurance, and employment contracts on time. Foreign businesses and expats looking to expand their operations in the German markets can do this without establishing a new entity in Germany. 

Talk to us to learn more!