Why are there still sole proprietorships

Founding sole proprietorships: possible legal forms for solo founders

What is a sole proprietorship?

Sole proprietorship is any business that is founded by an individual. The solo founder founds the company without a management team. He can certainly employ staff. The sole trader owns his company 100% and he can make decisions without first having to coordinate with a co-owner or a co-managing director.

The term sole proprietorship is not defined in the law. Therefore, in practice, you have the choice between different legal forms when you set up a sole proprietorship or plan to start a business as an individual entrepreneur.

Start-up service for sole proprietorships

What motivates the founder of a sole proprietorship?

Which legal forms are possible for my sole proprietorship?

Starting a sole proprietorship is always a risk. A key differentiator in sole proprietorship is the question of whether the sole proprietor is liable with his private assets or not. Accordingly, the legal forms with which you can set up a sole proprietorship can be divided into two categories.

Legal forms for sole proprietorships with unlimited liability

One of the sole proprietorships for which you are personally liable as the founder

Small businesses and merchants are among the commercial sole proprietorships. A freelancer, on the other hand, runs a non-commercial sole proprietorship. You cannot freely choose the legal form freelancer. It is bound by legal requirements and is only open to certain professional groups. These include, for example:

  • Notaries, lawyers, tax consultants, pharmacists, naturopaths, designers, journalists, consultants

The explanatory video "Founding a sole proprietorship - simply explained" by our partner Explainity provides important decision-making criteria for the three legal forms of small business owners, Kaufmann e.K. and freelancers. We will then show you the legal forms that you can use to limit liability when setting up a sole proprietorship.

The video was made available by www.explainity.de.

Legal forms for sole proprietorship with limited liability

In order to avoid full liability with sole proprietorships, corporations are open to you, which you can set up as an individual. This includes

In practice, however, the small AG is not particularly relevant for solo founders. Therefore, in the following, we will concentrate on the UG and the GmbH, which you can also use as a single founder for self-employment.

Legal forms for starting a sole proprietorship in comparison

In the tabular overview, we first introduce you to the main features of the legal forms that are possible for setting up a sole proprietorship. In this way you can quickly gain an initial overview and, if necessary, exclude individual legal forms. Then we will go into the above-mentioned aspects in detail.

 freelancerSmall businessKaufmann e.K.Basement1-person GmbH
Business-
Registration
NoYesYesYesYes
Commercial
register entry
NoNoYesYesYes
Company nameNoNoYesYesYes
IHK / HWKNoYesYesYesYes
personal
liability
YesYesYesNoNo
minimum
seed capital
NoNoNo1 €€ 25,000, of which € 12,500 at the start
accountingYOURYOUREÜR / balance sheet, income statementBalance sheet, income statementBalance sheet, income statement
Business-
tax
NoYes, but an allowance of up to € 24,500Yes, but an allowance of up to € 24,500YesYes

10 important questions to ask when starting a sole proprietorship

What about the individual points when starting a sole proprietorship? For example, when it comes to registration, accounting or the company name and what are the differences between the legal forms mentioned. We answer the 10 most important questions for you when you start a sole proprietorship.

Core questions Founding a sole proprietorshipExplanation
1st ownerWho is the owner of the sole proprietorship or, to put it another way, who owns the company?
2. ManagementWho is the managing director of the sole proprietorship or, to put it another way: Who decides and determines?
3. Formation processHow is the sole proprietorship founded? Which steps are necessary for this? With which institutions (tax office, trade office, professional chambers) do you have to register your sole proprietorship? Who needs a notary to set up a sole proprietorship?
4. Company name / company nameWhat name can the sole proprietorship have? An important aspect for marketing too.
5. FinancingWhat are the rules for starting capital for sole proprietorships? What financing options does the sole proprietorship have in the start-up phase and in the growth process?
6. LiabilityHow is the sole proprietorship liable and how can you limit and cover liability?
7. Distribution of profitsWho is entitled to the profit or, to put it another way: Who is allowed to put the profit in their pockets?
8. Accounting DutiesWhich sole proprietorship has to use double entry bookkeeping with balance sheet and income statement? For which sole proprietorships is simple bookkeeping with an income-surplus account sufficient?
9. TaxesHow are the different legal forms of sole proprietorship taxed?
10. Disclosure obligationWhich sole proprietorships have to publish their annual financial statements?

# 1 - who owns the sole proprietorship?

The answer to this central question when starting a sole proprietorship is: The founder and entrepreneur is the sole owner of the sole proprietorship. In the case of small businesses, business people and freelancers, the entrepreneur is the owner of the company. In the 1-person GmbH or the 1-person UG, the sole proprietorship is the sole shareholder.

# 2 - How is the management of the sole proprietorship regulated?

Another key question when founding a sole proprietorship is: who determines and who decides? Here, too, the following applies to freelancers, small businesses and registered merchants as sole proprietorships: They are the bosses and can determine and decide without having to coordinate. If you set up a sole proprietorship in the legal forms 1-person GmbH and 1-person UG, you are usually also the sole managing director. However, you can hire an additional managing director for these two legal forms.

The advantage of sole management authority is that you can decide quickly without too many cooks spoiling the broth. This becomes dangerous when decisions of great importance are made spontaneously and without thought. A good management consultant can support you here. You should also use the tax advisor as a conversation partner for economic issues. Membership in entrepreneur groups is another way of broadening one's horizons for good decision-making.

You should also keep the risk of work overload in mind when starting a sole proprietorship. If you have employees, the topic of delegating responsibility should be considered. It is advisable to delegate time-consuming processes to digital helpers, for example to good invoicing programs or accounting software.

# 3 - What is the start-up process like in a sole proprietorship?

The establishment of a sole proprietorship comprises up to 8 steps, depending on the legal form. The following table gives you an overview of where you have to register if you are setting up a sole proprietorship in your chosen legal form.

Founding stepfreelancerSmall businessesKaufmann e.K.1-person GmbH / UG
notaryNoNoYesYes
commercial registerNoNoYesYes
commercial office
Business registration
NoYesYesYes
Tax office
Tax registration questionnaires
YesYesYesYes
Stand chambers for
Freelancers
Yes if
applicable
NoNoNo
IHK / Chamber of CraftsNoYesYesYes
employment exchange
Company number
Yes, if employees are employed
Trade associationYes, mandatory for all legal forms
Duration and costs   
Duration of establishmentin one dayup to 2 weeksup to 4 weeks
Establishment costsno registration costs< 50 €approx. 300 €> 650 € 

The freelancer sets up his sole proprietorship free of charge and within a day. Small business owners can also set up a sole proprietorship in a day, but there is a small fee for registering a business.

While freelancers and small businesses set up their sole proprietorship free of charge, the registered merchant pays the notary fees and the registration fees in the commercial register. In the case of 1-person corporations, it is even more complex and therefore more expensive because the fees for the articles of association are added to the notary fees and the registration fees in the commercial register.

The costs of establishing a GmbH are well in the three-digit euro range. In addition, the GmbH phase prior to registration is not entirely free of risks. Read our article on the GmbH in formation.

# 4 - How is the company name regulated in sole proprietorship?

The company name is an important marketing tool that you can design when starting a sole proprietorship. There are differences between the legal forms of sole proprietorship.

Legal form sole proprietorshipCompany nameInformation on the stationery
freelancerThe last name is sufficient. The company name should indicate the status of a freelancer.
Example: Clear design
First name, last name, address, telephone, email, website
Small business ownerSole proprietorships cannot use a company name, just a company or business name. The identity of the owner must be clear. Fantasy names are not possible.
Example: Blumen Schmidt, owner: Eva Schmidt

First name, surname, address, telephone, email, website

Kaufmann e.K.A fantasy name with the addition e.K. as a company name is possible.
Example: Blumengarten e.K.
Company name, address, telephone, e-mail, website and also the HR number and the registration court
1-person GmbHFantasy name with the addition of GmbH as company name possible
Example: Blumengarten GmbH
like Kaufmann e.K.
1-person basementFantasy name with the addition of UG (limited liability) as a company name.
Example: Blumengarten UG (limited liability)
like Kaufmann e.K.

If you also use your stationery to create invoices, you must of course consider the mandatory elements of an invoice.

# 5 - Financing at sole proprietorship

Starting a sole proprietorship is a matter of finance. Here we differentiate between start-up financing and growth financing. When it comes to start-up financing, the main question that arises is the minimum starting capital if you are setting up a sole proprietorship. The overview shows you the main regulations.

Legal form sole proprietorshipSeed capitalGrowth financingFinanciers
Small business owner,
Kaufmann e.K.,
freelancer
no minimum starting capital requiredAlways tied to the person, collateral necessary, depending on good business development, initial losses are not refinancedFamily, friends, house bank
GmbH€ 25,000 required by lawFunding basically independent of the person, collateral necessary; positive growth expectations decisive; Initial losses can be refinanced.Family, friends, house bank and investor
Basement€ 1 start-up capital required by lawObligation to retain profits until equity of € 25,000 is reached; otherwise like GmbHFamily, friends, house bank and investor

Founding a sole proprietorship: start-up financing

For freelancers, small businesses and business people (Kaufmann e.K.) it is easy to set up a sole proprietorship. Because there are no legal regulations on start-up capital for these three legal forms. The founder needs sufficient start-up capital in order to be able to bear the investments and the running costs of the first few months. The financial plan helps to determine the capital requirement. The founder can contribute parts of his private assets as equity. For example, savings, inheritance or assets that can be used for business purposes. If there is not enough equity to start a business, freelancers, small businesses and businesspeople need outside capital to set up their sole proprietorship. This is usually a financing through the house bank. The taking out of loans through the house bank depends on the collateral that the sole proprietorship provides to the bank. Subsidies are a great way to finance a business start-up.

If you want to set up a sole proprietorship as a 1-person GmbH, according to the law, you need start-up capital of € 25,000, of which at least € 12,500 must be paid in at the start. The founder of a 1-person UG only needs a start-up capital of € 1. In the case of 1-person corporations, too, collateral must be provided to the house bank for the establishment of outside capital, especially when it is founded.

Founding a sole proprietorship: expansion financing

Expansion financing depends on the positive business development. Firstly, because equity can be built up through positive business development. On the other hand, because house banks rate the positive business development positively and are therefore more willing to grant expansion financing. In the case of freelancers, small businesses and registered traders, corporate financing is always tied to the individual entrepreneur. If the entrepreneur fails, this means the end of the company, unless a successor can be found.

This is different with the 1-person corporations, because here third parties can participate as shareholders in the company and these shareholders can make a change in the management. As soon as an investor joins a GmbH, initial losses can also be compensated, provided the business model promises the investor a chance for future success. Whether it is still a sole proprietorship when an investor joins depends on the modalities of the investment. As soon as the investor claims management skills, strictly speaking we no longer have a sole proprietorship.

# 6 - Sole proprietorship liability

The liability risk is a key issue when starting a sole proprietorship. If you are a freelancer, small business owner or businessman e.K. If you set up a sole proprietorship, you have unlimited liability with all your assets. The liability risks when starting a sole proprietorship include:

  • Compensation risk: Risk of causing damage through business activity. Through the product or service itself and in the manufacture of the product and service
  • Bankruptcy risk: Risk of not being able to pay bills and having to file for bankruptcy.

In the worst case, as the owner of a sole proprietorship, you will not only lose the monies and resources that you have invested in your company, but also all of your private property: real estate, valuables, savings. This is often associated with loss of reputation, family crises and social decline.

If, on the other hand, you set up your sole proprietorship as a 1-person corporation, only the company, i.e. the 1-person GmbH or the 1-person UG as a legal person, is liable. As a sole proprietor and sole shareholder in a GmbH or UG, in the worst case you will lose the funds that you have invested in your company. However, you should bear in mind that the house bank will always ask for collateral, for example your private property, in the case of start-up financing. In this respect, as a sole trader in a 1-person corporation, you risk not only corporate assets but also your private assets, which serve as security for financing.

If you want to set up a sole proprietorship, you should find out about legally required and operationally necessary insurance in good time.

Insurance for sole proprietorships

# 7 - Profit Distribution

A key benefit of starting a sole proprietorship is that the distribution of profits is easy. The profit in a sole proprietorship belongs exclusively to the owner or the sole shareholder. He owns the sole proprietorship, so he is entitled to the income. In this point, too, there are no differences between freelancers, small businesses and registered merchants.

As the sole shareholder of a GmbH, you are of course also entitled to all profits from the GmbH. With the sole shareholder of a UG there is a special feature: the profits of the UG may not be distributed until the 1-person UG has topped up the equity to € 25,000. The sole shareholder of a UG therefore owns the profits of the UG, but is not allowed to freely dispose of the profits.

# 8 - Accounting obligations for sole proprietorships

Starting a sole proprietorship also raises questions about accounting. Does a sole proprietorship have to do double-entry bookkeeping with a balance sheet and income statement, or is simple bookkeeping with an income-surplus account (EÜR) sufficient? This is where freelancers, small businesses and registered traders (Kaufmann / Kauffrau e.K.) and 1-man corporations differ from each other. The following table explains this:

Legal form of the sole proprietorshipEasy accounting with EÜRDouble bookkeeping with balance sheet and income statement
freelanceronly EÜRNo
Small business ownerYes, if sales Yes, if sales> T € 600 and profit> T € 60
Kaufmann e.K.Yes, if sales Yes, if sales> T € 600 and profit> T € 60
1-person corporation
(UG and GmbH)
NoYes always

The cost of the bookkeeping is of course different. Simple bookkeeping with EÜR is generally cheaper than double bookkeeping with annual financial statements (balance sheet / income statement). No matter how you have to do the bookkeeping later: we have put together these and many other topics related to bookkeeping for you.

# 9 - Major Tax Differences When Starting a Sole Proprietary Business

The forms of sole proprietorship also differ from a tax perspective. Here are the main issues:

Type of taxfreelancerSmall business owner,
Kaufmann e.K.
1-person GmbH
1-person basement
Income taxYesYesYes, as a partner
Business taxNoYes, but an allowance of up to € 24,500Yes
value added taxYesYesYes
Corporation taxNoNoYes

All owners of a sole proprietorship are subject to income tax as individuals. The profits of the sole proprietorship are taxed for freelancers as part of the income from freelance work, for commercial sole proprietorships as income from commercial activities in the context of private tax returns.

The partner of a 1-person corporation pays taxes on the profits of the GmbH as part of his personal income tax. The corporation itself is subject to corporation tax.

Commercial sole proprietorships are subject to trade tax. Freelance sole proprietorships do not pay any trade tax. There is a trade tax risk for those freelancers who take up commercial activities as part of their business model. Example: A dentist sells his specially designed organic toothbrushes in his practice. You should be extremely careful here and always coordinate such plans with your tax advisor.

If sole proprietorships have employees, they of course pay wage tax as part of the wage and salary slips together with the employer's social security contributions.

# 10 - Does the sole proprietorship have a disclosure requirement?

Freelancers, small businesses and registered traders do not have to publish their annual financial statements. This is an advantage, because it means that nobody can look into the cards of the sole proprietorship.

As the sole shareholder of a 1-person corporation (GmbH, UG), you must publish your annual financial statements. There are simplified rules for small corporations: Small corporations do not have to publish their profit and loss account (P&L), but everyone can get an idea of ​​the financial situation of your company. Read more about the disclosure requirements in our chapter on the annual financial statements.

Establish sole proprietorship and limit liability

Our 10 criteria for sole proprietorship have shown that liability risk is the greatest risk for sole proprietorships. Anyone who misjudges the business plan or causes damage with his entrepreneurial activity is risking all of his assets. 1-person corporations are one way to limit entrepreneurial risk to corporate assets when starting your sole proprietorship. In addition to the 1-Personen-GmbH or the 1-Personen-Unternehmergesellschaft (UG), the 1-Personen-AG and the Limited are also available as legal form alternatives. However, these two legal forms are very rarely chosen for setting up a sole proprietorship.

In any case, you should take out appropriate insurance to reduce the risks of starting a sole proprietorship. For example, if you take out business interruption insurance, you are covered in the event that you have to interrupt your business activities due to damage or disaster.

In principle, you can also split risks by setting up a team with several people. A partnership or a corporation can then be considered for setting up your business. But then you are no longer a sole proprietorship.

Start-up service for sole proprietorships

The business account for sole proprietorships

When starting your sole proprietorship, you need a business account. Before opening a business account, you should ask yourself the following questions:

  • Do you need a bank account that allows you to deposit and withdraw cash easily and as free as possible?
  • Does the bank even offer business accounts for the legal form in which you are setting up your sole proprietorship?
  • Do you need financing advice from the bank where you manage your business account?
  • Does your business account offer credit cards and debit cards for any purchases for your sole proprietorship?

In sectors such as the catering trade, in particular, the cash share in business sales is still very high. But not every bank account allows cash transactions. Not every bank offers a business account for every legal form. Pure online banks usually do not offer any financing advice or personal support. You can also not get the EC card for the business account at every bank.

You will therefore find extensive advice pages on business accounts for sole proprietorships with us. You can also download a comparison of different bank accounts for starting a sole proprietorship.

Here we present selected business accounts that you can open quickly and inexpensively.

Open a business account

This is how often sole proprietorships were founded in Germany

In relation to the total number of start-ups according to business registration, the founding of a sole proprietorship was 79% well ahead of other legal forms. This is based on figures from the Federal Statistical Office for 2017. Freelancers who set up a sole proprietorship and do not have to register a business are not taken into account. Further figures on the start-ups at sole proprietorships were:

  • 35% are women who set up a sole proprietorship - 65%, on the other hand, are male founders who set up a sole proprietorship
  • 73% of sole proprietorships are founded by German citizens, with 6% Polish citizens are in 2nd place when it comes to setting up a sole proprietorship. Romanian entrepreneurs, who set up 4% of sole proprietorships, follow in third place. Turkish start-ups take 4th place with 3%.
  • Most sole proprietorships - namely 22% - were founded in North Rhine-Westphalia in 2017, followed by Bavaria and Baden-Württemberg with 16% and 12% respectively.

By the way: in addition to the establishment of a sole proprietorship, the establishment of a GmbH with 10% and the establishment of a GbR with 5% ranked second and third. Around 2% of the new companies chose the legal form of the UG. This makes it clear, however, that start-up activity in Germany is determined by sole proprietorships.

Conclusion - starting a sole proprietorship: advantages and disadvantages

When you set up your sole proprietorship, you have several legal forms to choose from. These legal forms - the freelancer, the small business owner, the registered businessman and the 1-person corporations - differ in the establishment process, accounting obligations and taxes. The question of naming is also an important decision criterion when starting your sole proprietorship. Only registered merchants and 1-person corporations can give your company an imaginary framework.

Freelancers, small businesses and registered traders are legal forms with unlimited liability. The owners of these sole proprietorships are therefore also liable with their private assets for all debts of the company with their own assets. On the other hand, the founding process is very simple with these three legal forms. The 1-person corporations offer the possibility of reducing the liability risk on the company's assets. However, the founding process for these 1-person GmbHs or 1-person UGs is more complicated, lengthy and expensive.

The advantages of the uncomplicated establishment and the chance to be your own boss make the sole proprietorship a popular legal form. The liability risk hovers over the founder like a sword of Damocles. In any case, the founder of a sole proprietorship should take care of adequate insurance coverage. Anyone who chooses the legal form of a corporation when founding a sole proprietorship should know, however, that the obligation to publish the annual financial statements is the price for the reduced liability.

Author: Für-Gründer.de editors

As editor-in-chief, René Klein has been responsible for the content of the portal and all publications by Für-Gründer.de for over 10 years. He is a regular interlocutor in other media and writes numerous external specialist articles on start-up topics. Before his time as editor-in-chief and co-founder of Für-Gründer.de, he advised listed companies in the field of financial market communication.