Freelancing and self-employment is often the dream of office workers - do what you love to do, decide when and how you work, report only to yourself, work only for people you want to - and when you say it like this, it is the dream. However, when you decide to pursue this dream remember, there are things you are giving up: someone else to manage all the business affairs that come with it all! The first step of that is, of course, registering a business. Now, you may think: no problem, it seems like in Germany, it’s just some forms and you are good to go. Well, this is where things get complicated. The type of business you register has massive implication for your finances - your tax, your revenues, your expenses and your ability to operate in a specific trade. Today, we are taking a look at the credentials and certificates you will need for your business so you can be one step ahead and avoid registering your business in a way that might be a disadvantage for you!
Before we start with the first step in business registration, let’s begin by looking at the issue of legal forms. This article is aimed primarily at sole proprietors who wish to register within their trade and function. Since the start-up processes for the different legal forms can be very different, it would not make any sense to address the different styles of partnership in such a broad fashion- Let’s reduce this to the purest core of the idea: a distinction is made between sole proprietorships, partnerships and corporations.
Registering a business: recognising the different legal forms
Partnerships are almost always start-up teams in which all founders (= shareholders) want to actively contribute and plan to build a business together. The most well-known legal forms are the GbR (company civil right), the OHG (open trading company) and the KG (limited partnership). The main difference to the sole proprietorship is - what a surprise - the number of founders. The process of registering the business is very similar to the process of individual companies. But there is also the agreement and involvement of the founders. Or in short: the founders need a social contract before the actual business registration, in which duties, tasks, risks and distribution of profits are regulated. Depending on how complex the chosen legal form is (GbR = very slim, KG = many legal provisions), more or less legal formalities have to be fulfilled. Seek professional advice on this matter if you are to proceed with a partnership - it is more commitment than marriage!
Corporations differ significantly in their legal structure from individual companies. Essentially, you create a new ‘person’ in the eyes of the law and taxation. It is a new entity, and it is for this reason that corporations are called ‘Legal Persons’. Remember, sole proprietorship and partnerships as discussed above essentially ensure the legal liability of the individuals involved. For better or worse!
The most commonly used corporations in Germany are the UG (Unternehmergesellschaft), theGmbH (Limited Liability Company) and the AG (Aktiengesellschaft). Registering these legal entities, you definitely need a notarized deed of foundation and also the opening of a business account and the entry in the commercial register at the local district court are much more complicated. Normally, the notary, who takes care of the certification of the articles of association, also helps you with all other founding questions. If you have no idea about the subject matter, it’s best to look for a notary who is part of a partnership with tax consultants and seek assistance through a network of people who know exactly what they are talking about. Through such a network, you have all the contacts in one place and you can make sure that all aspects of the foundation are observed. Should you be interested in starting a corporation then the remainder of this article will not assist you. There are, however, many other articles on the Kontist blogged geared toward you.
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Step One: Do You Need To Register Your Business?
Not every form of self-employment requires a business registration. From a purely legal point of view, you only have to register a trade if your future income is classified by the tax office as “business income”.
Now, there are two classifications that act as the reasoning as to why the Finanzamt would not view your business, as generating business income. Without question, the following two points disqualify your from needing to register the business:
- the nature of your activity is not a commercial activity or
- you do not want to make a profit with your self-employment.
Freelancers are not a business entity
Freelance work is not subject to trade regulations and therefore does not have to be registered as a trade. So if you are a freelancer, you can stop reading here. You do not have to register a trade, nor do you have to pay trade tax later. However, which professions are classified as a freelance activity and which as a commercial activity cannot always be clearly distinguished from one another. In §18 EStG (income tax law) there professions listed some occupations, which are always considered freelance:
- Doctors, Dentists and Veterinarians
- Lawyers, patent attorneys and notaries
- Surveyors and engineers
- Auditors, tax consultants, consulting business economists, certified accountants
- Naturopaths and physiotherapists
- Journalists, interpreters Image reporters
- other professions
In addition, there are occupations with similar tasks and activities that are scientific, artistic, literary, teaching or educational. As you will probably notice, these legal regulations leave a great deal of room for interpretation and there are occupations that cannot be clearly classified as freelance.
If you find yourself in this confused state, understandably, the Federal Association of the liberal professions LINK will help you. Another possibility would be to write to the tax office directly, to describe the facts and to ask for a binding assessment. You should absolutely make sure that you ask for a binding information under § 89 AO , as the tax office otherwise may change his mind.
The differentiation between commercial and freelance work is crucial because it determines if you are liable for trade tax. Freelancers are basically exempted from paying trade tax and thus do not have to submit a trade tax return.
But that does not mean that traders actually have to pay more taxes in total. Since the paid trade tax can be counted almost completely on the private income tax return, the trade tax liability ensures the bottom line only that traders have to pay trade tax to the competent municipalities and in return pay the (almost) the same amount less income tax.
At first glance, this whole procedure seems typically German and bureaucratic. And indeed, the whole thing has purely political reasons. The trade tax is fully due to the municipalities in which the trader is based. On the other hand, income tax is shared between the federal government, the federal states and the municipalities.
As communities are unlikely to forego their main source of revenue over the coming years, the current system will not change in the near future.
Registration as a freelancer
The fact that freelancers do not need to register a trade does not mean that they do not have to worry about anything at all. You can only save the walk to the trade office.
Instead, you should jump directly to step 5 and fill out the tax registration questionnaire and send it to the tax office. As a freelancer, you have to do it independently, because the Treasury, unlike business people, otherwise learns nothing of your start-up. An entry in the commercial register is also not necessary for freelancers. If the business of a freelancer becomes so large that it requires a “commercialized business”, then it is usually no longer a freelance activity but an entrepreneurial activity. In this case, a trade would have to be registered. If this is the case, you will find out later in the section on the Commercial Register. Most freelancers are not required to become members in the Chamber of Commerce or in the Chamber of Crafts, as many professions have their own chambers (eg: Bar Association, Chamber of Architects or Chamber of Tax Advisors). We recommend you follow up here
Self-employment without profit
If you make money from a hobby, you do not necessarily have to sign up for a trade. As a trade, you are only viewed if you actually have a profit-making intent and exercise your activity in the long term.
Example: If you like to write in your spare time and publish your texts in your private blog, you are not a business. This protection extends even if you occasionally get donations or other donations from loyal readers, but they never cover your expenses.
The tax office class this as a hobby and classifies the activity as a hobby. If a Euro here or there is earned this should not create problems or prompt registration as long as you do not achieve permanent profits. However, in return, you may not claim the costs of web hosting, programming or photo rights as operating expenses.
That said, if you are conducting your business online…
Especially the Internet has made many constellations possible in recent years, in which people initially pursued only one hobby and later not only revenue but also (high) profits have achieved.
You are self employed, if: you exercise an activity permanently and thus earn an income. You must register this activity in any case and tax the income. This is true for creators, bloggers with business-focused blogs, Instagram channels funded through line items, or online merchants on eBay, Amazon, or niche sites such as gadgets.
The big mistake with the small business
The word small business does not exist in the tax and commercial law.
When looking for a definition for small businesses, one finds above all the interpretation that small businesses are companies that are not covered by the Commercial Code. This refers to companies that are managed as individual companies and do not have to be run commercially. You can assume that if your turnover is less than 250,000 EUR and you have less than 5 employees.
However, this does not matter for the business registration. Even small businesses have to register a trade and register this with the tax office. Only the entry in the commercial register can be waived.
Problem: Confusion with the small business regulation
Occasionally, a small business is also confused with the small business regulation. The small business regulation, which concerns only the sales tax, has nothing to do with a certain type of trade and must not be confused with the above definition. The small business regulation frees small businesses from the bureaucracy involved in VAT billing and sales tax pre-registrations. Small entrepreneurs do not charge value-added tax (VAT) and may not claim input tax in return.
The small business scheme can be used by any company that meets the following two conditions:
- The turnover last year was under 17,500 EUR of revenue in the current year is expected to fall below 50,000 EUR
- The small business regulation is requested with the questionnaire for the tax registration at the tax office registration (see step 5).
- Freelancers do not need a business registration, they only have to register with the tax office.
- All others must register as a business enterprise, even if it is only a Nebengewerbliche activity.
- As soon as you earn a lot of money with an activity that you may have considered a hobby, you should check whether you are considered to be independent for the tax office.
- The small business regulation has nothing to do with a so-called small business. Even small business owners have to register a trade.
Step 2: The right time - When must the trade be registered?
After we have clarified who needs to register a trade at all, we turn to the question of when the trade should be registered. Principally, several points in time would be considered, because a company does not arise overnight and it is difficult to determine the first day. Here are the most common times to register your trade:
- The time when the business idea was born.
- The time when the business plan was created.
- The day on which the first contracts are concluded.
- The day on which the first revenues flow.
- The day on which the first issues are made.
- Just before the first tax return has to be made.
- Later times when certain sales limits are reached.
The trade regulations provide for a clear definition of registering: A trade must be registered as soon as a commercial activity is commenced.
The business registration must, therefore, be between point 2 and 3. Although the business idea and the business plan are important, they are not yet part of the actual commercial activity. But as soon as you appear as a self-employed person, conclude contracts or make investments, you are already doing business. So you should register your trade first.
A later registration can lead to fines and additional payments. In addition, you make your life unnecessarily difficult, because in many situations you need a trade license or have to give your tax code. For example, you need your tax code to write correct invoices. But you get this only after you have registered the trade and after the registration with the tax office.
Attention! The start date of your self-employment is not the day of the business registration but the day on which you start your self-employment. This day you should also specify in the form for business registration.
Expenses before the business registration
Being in business for yourself always requires an investment, and the fees associated with registration should be considered your first ‘investments’. Even if it makes sense to register your trade as early as possible, expenses often arise before the business registration. These costs can be claimed by founders in the form of anticipated business expenses at the tax office, thus forcing their subsequent corporate profits and saving income tax.
In principle, all expenses related to the formation of the company and the future company can be deducted. These include, for example, travel expenses, trade fair visits or even specialist literature and consulting fees, which arise through start-up consultants, lawyers or tax consultants. Since costs must be claimed for tax purposes in the year in which they arise, it would be easiest if you register your trade in the year in which the first costs arise.
However, the Federal Finance Court has repeatedly confirmed that even expenses can be claimed up to three years before the business registration.
- You should register your trade before you start your business.
- A failed business registration can be punished with up to 3600 Euro fine. You should tend to sign up for your business too early rather than too late.
- Even before registering for a business, you can deduct all expenses related to starting up your business and your future independence. Condition: You must not be older than 3 years.
Step 3: What you should do before the business registration
Anyone who goes completely unprepared to the trade office and believes that they will immediately receive their trade license, is quite often disappointed. Oh, Amt life! In many industries and areas, you will need specific licenses and permits to start and operate a business. In order to save you an unnecessary visit to the trade office, you should first educate yourself whether you need specific approvals for your business idea. A final listing of all approvals would go beyond the scope here, so we focus on the most common concessions: In addition to an operating permit issued by the local public order office, restaurateurs also need a restaurant license to serve alcohol (formerly a “Schankerlaubnis”). Even a health certificate that can be made at the health department should be proven. Craftsmen need a craft card or a business card for craft-like businesses, which you can get from the Chamber of Crafts.
Insurance brokers and financial investment advisors require a license from the responsible IHK before registering for business Also for the commercial passenger transport (for example taxi driver and bus driver), a concession is needed, which you must apply for at the trade office or regional council.
If you want to become self-employed as a security service in property and personal security, you need a permit before you can register your business
- Health care
- Personnel services and temporary employment
- Arms trade (including ammunition, explosives and poisons)
- Operation of gambling halls
- Estate agents
The specific admission requirements differ from region to region (of course). Basically, the trade regulations are always binding but can be supplemented locally by regulations.
Foreign nationals should also note that they must submit a residence permit from the responsible foreigner’s authority. This permission must expressly state that you have the permission to pursue a trade activity (work permit). To clarify in advance which certificates and permits you need to register your trade, it is best to contact the Trade Licensing Office or seek advice from the local Chamber of Commerce and Industry (IHK). For more infos about the IHK, see our blog article Freelancers - What is the IHK and How Can It Help You?.
In many industries, you need permits and concessions to register a trade. Inform yourself beforehand what conditions exist in your industry and which concessions you need for self-employment. A quick call to the IHK or the Gewerbeamt should give you a first impression.
Step 4: The business registration
After you have clarified whether you have to register a trade and all necessary licenses have collected certificates, we come to the actual business registration. This step is done very quickly if you have everything well prepared. As they say in the Scouts Honour: always be prepared.
It is recommended to download the business registration form before the deadline and to fill it out at home. Then you have more time, you can read everything in peace and save valuable time in the office. If you do not understand everything, you should take note of the questions in advance and clarify them with the clerk in the trade office. Which authority is responsible to register your business, you should first research the Internet. Depending on the federal state, the business registration is taken over by the municipality or the Chamber of Commerce or the Chamber of Crafts.
In Bavaria, Hamburg and Rhineland-Palatinate, for example, the chambers are responsible, while in most other federal states, the municipalities in which the company is to be established, are responsible.
The trade must always be registered by the trader himself. This means that as a sole proprietorship you have to go to the office yourself. If you found a partnership or corporation, the respective shareholders or managing directors must carry out the business registration.
At the actual appointment, you submit the “business registration form” with all additionally required certificates to the clerk of the trade office. You can usually take your trade license right away. Strictly speaking, the trade license is just the application form that has been signed and stamped. It is your official permission to do your trade.
Business registration form
The form “business registration according to § 14 GewO or § 5c GewO” with which each founder records the details regarding his trade, consists of only one page is quite self-explanatory. The founder must give particular information on the following two points:
- Details of the registrant (name, address, nationality, etc.)
- Information on the operation (address, legal form, contact details, business purpose, etc.)
Business idea or registered activity
To register for your trade, you must provide information about what activities you want to perform. Examples include “furniture production”, “electrical installation and electrical retailing”, “wholesale food”, etc.
It is highly recommended to formulate the business purpose as general and broad as possible. Since you have to communicate every change in your trade to the trade office, it can get very annoying if you have become too concrete in this field.
Instead of the business purpose of “developing and selling the iOS apps” it would be better to write “Development and distribution of various applications including all auxiliary businesses”. By such a broad formulation, you will later have more freedom in your activities and do not have to go back to the trade office so quickly to change the business purpose. Try to think about everything else you have to do in the business context, beyond just the ‘core’ of the work!
Incidentally, the name of your company does not matter if you register a business as a sole trader and do not register yourself in the commercial register. Your company is always legally entitled to these cases like you. So your name always has to be on your bills and not a fancy fantasy name.
Of course, you can still think up a brand and register, for example, under this name a domain or create a bell sign. In business practice, however, this name has no serious (legal) meaning. So do not spend too much time finding the name.
Sign up for a small business as side income
In the form to register your business, you have to indicate, among other things, whether you want to start your business as a side role or full-time acquisition. As a rule of thumb, keep in mind that everything under 18 hours per week is considered a sideline. In addition, the secondary activity may not be more extensive than your main job. The classification is particularly relevant for the statutory social security funds because you have to pay for your part-time self-employment no compulsory contributions. You already pay the contributions as part of your main activity.
Register your business online
Whether you have to appear in the commercial office depends on your local guidelines. So far, only Berlin has managed to map the complete business registration online. For this you have to use the online form offered for this purpose: register your business online in Berlin.
In other localities, it’s only possible to fill in the form to sign up for your business online. But for the personal signature, you need an appointment with the responsible authority. Again in other municipalities, it is possible to send the form by post. You save yourself the way to the trade office and can use your time more meaningfully. In the future, it will probably be possible in every locality to register their trade online. How long that will take is not yet foreseeable. Expats, feel free to roll your eyes now. But remember, you chose this!
Cost of business registration
How expensive the business registration is depends on where you live. The cost of registering your business is set by your community and ranges from 10 to 60 Euros. However, this includes only the pure business registration in the community or the IHK / HWK. Since you may have to obtain various proofs and certificates in many industries before the business registration, the costs of the entire company foundation can be significantly higher.
- The business registration must be carried out at your municipality or the local IHK / HWK.
- In some communities, it is already possible to register a trade by mail or online. The easiest way is usually the personal appointment with the responsible authority.
- It is best to fill out the form for business registration and bring it to the appointment with: Form for the business registration LINK.
- To register your business you have to expect a cost of about 20-60 EUR
- Documents: You will need your ID card or passport, all necessary permits (see step 3) and the completed form to register your business
Step 5: After you have registered
After you registered your trade, not everything is done yet. You only have your business license, but you still need different numbers and proofs. Once you sign a trade, such as the tax office and the competent Chamber of Commerce are (IHK) and the Chamber of Trade (HWK) informed that there is a new business enterprise. In addition, the State Statistical Office and the Trade Inspectorate receive a notification that you are now commercially active. You do not have to do anything for these applications. The authorities that need more information from you will contact you by mail.
Registration with the tax office
As soon as the tax office is informed about your self-employment, you will be sent a questionnaire for taxation, which you must complete and send back. If you want to speed up the whole process, you can also download the questionnaire and fill it out yourself and send it to the tax office without being asked. If the tax office has all the details and you will get a tax number for your income tax and trade tax sales tax. Since you need this tax number to write correct invoices, it should be in your interest to complete the tax collection questionnaire as soon as possible and send it back to the tax office. Once the registration is completed with the tax office, your business is registered and you can get started with your work.
Do I need a tax accountant?
Kontist have covered off this decision process already and you can read about it on the blog post Freelancers - Do you need a tax advisor?.
Chamber affiliation with the IHK / HWK
Not only the tax office is notified when you register a trade. The associated chamber will also receive a notification from the Trade Licensing Office and then send you a registration form, which you should fill in and submit. In most cases, either the Chamber of Industry and Commerce (IHK) or the Chamber of Crafts (HWK) is in charge of you.
Basically, there is a compulsory membership in the respective chamber in Germany and you can not choose to become a member. This IHK duty is discussed again and again and rejected by many self-employed. The Chamber of Commerce and Industry regularly organizes business start-up networking events for entrepreneurs, where you can participate as a self-employed person free of charge. In addition, the IHK is responsible for the implementation of vocational training and is your first point of contact if you are looking for a trainee.
The amount of the IHK contributions depends on your company size (turnover and profit) and must be paid annually. For small businesses the membership is free for a profit of up to 5200 Euro per year. Entrepreneurs also do not have to pay any contributions in the first two years if their annual profit is less than 25,000 EUR.
Entry into the commercial register
You only have to register in the commercial register if your company requires a business operation that is organized according to type or extent in a commercial manner (definition from the Commercial Code).
This formulation allows room for interpretation and ensures that it is not always clear who has to register in the commercial register. It must, therefore, be decided from case to case. For this, the following criteria are assessed:
- Amount of sales
- Number of employees
- Scope of business processes, products and services
- Size and equipment of the business premises
- possibly external financing through loans These criteria are used to assess whether your business needs to be run commercially (and you must be entered in the commercial register). As a rule of thumb in practice, it has become clear that you are a commercial business if you have a turnover of over 250,000 EUR and five employees. If you are below these limits, you do not need to deal with the commercial register. If you are unsure and close to the limits, you can contact the relevant Chamber of Commerce or Chamber of Crafts and ask for an assessment.
Attention: If you do not form a sole proprietorship but a OHG, KG or corporations such as a UG, GmbH or AG, you must always register yourself in the commercial register - regardless of your sales or employee numbers.
Other registrations after you have registered your business (business registration)
With the business registration, the registration with the tax office, the membership of the IHK or HWK and the registration of the commercial register you have covered the most important aspects of the foundation.
However, you will find that even here is not the end and other institutes, associations and authorities will contact you and you want to get registrations and information.
Here you should always check in individual cases, if there is actually a legal obligation and if you have advantages through a registration. After all, there are companies that take advantage of the confusion that erupts in many start-up companies and impose on you any chargeable memberships right after the foundation.
Berufsgenossenschaft - statutory accident insurance
Every company in Germany has to register with the employers’ liability insurance association. The professional association is the statutory accident insurance and cares in Germany for all accidents at work, occupational diseases and work-related health hazards. Most industries have their own professional associations. So you should first find out which employers’ liability insurance association is responsible for you and, after registering your business, register with this professional association. The registration should be made within seven days after you have registered your trade.
You can find more information on which Berufsgenossenschaft is responsible for you on the website of the DGUV - German Social Accident Insurance.
Federal agency for work
If you want to hire employees, you should also register with the Federal Employment Agency as an employer and apply for a company number. You need this company number to create the payroll for your employees. So you should not delay this application too long, otherwise, your employees have to wait for their salary.
As a self-employed person, you are no longer a mandatory member of the statutory health insurance. Even if this point is not directly related to the business registration, you should worry about whether you can get rid of the statutory health insurance and private insurances. Since the contributions to private health insurance are not based on your income, the change to private health insurance could be financially worthwhile. Want to know more: The healthy way to deal with insurance- A guide to insurance as a freelancer.
It has not been done yet with a single registration at the trade office. New companies must also be registered with the tax office, the competent chamber and the statutory accident insurance. Employers should also register with the Federal Employment Agency. The tax office and the Chamber of Commerce and Industry (or HWK) will be informed by the trade office about the new foundation and will contact you without your intervention.
Since you need a tax number to write bills, it should be in your interest to speed up your registration with the tax office. If you’re in a hurry, you can download the tax collection questionnaire here and send it to your tax office without being asked: tax collection questionnaire. If your business has a certain size, you must register it in the commercial register.
Re-register or Deregister Trade
To conclude, we will once again briefly devote ourselves to the end of your self-employment and clarify how you will register or deregister your trade.
In principle, you must notify the trade office of any changes that affect your trade. This applies both to the termination of your self-employment, as well as a move (relocation of the company headquarters) or a change in the field of activity. The re-registration is almost the same as the registration of your business. Most trades offices have certain forms to fill out or unsubscribe from. But the easiest way is also the personal appointment for which you should bring your identity card or passport and your business license. For the administrative burden, you can to expect a fee of 20 to 40 EUR. However, many trades offices completely waive fees and the deregistration is free. As with the registration of your trade, you do not have to inform the tax office separately because all information is passed on by the trade office to the tax office.
You should be aware that in many cases your concessions expire when you deregister your trade. So, if you just want to pause your self-employment, you should notify the Trades Licensing Office that you are taking a break for a while. Completely deregistering could be a lot more effort if you have to apply for all new permits a few months later.