Small business (Kleingewerbe): what it is, what it costs and which taxes apply

What is a small business?

The word Kleingewerbe does not appear as such in the law. It means a trade that is not a commercial business (Handelsgewerbe). Under Sec. 1 (2) HGB, every trade is a commercial business unless, by its nature or scope, the enterprise does not require a commercially organised business operation. This very exception is the small business. Anyone who runs one is not a merchant within the meaning of the HGB (German Commercial Code) and does not have to be entered in the commercial register. You can still register voluntarily (Sec. 2 HGB), and you then become a registered merchant (e.K.).

You run a small business as a sole proprietorship if you start alone, or as a GbR (civil law partnership) if there are several of you. Other legal forms are not an option: the UG, GmbH, OHG and KG must be entered in the commercial register.

Typical examples

• online shop as a side business with a manageable number of orders
• caretaking or cleaning service without a large staff
• food truck: a trade, depending on the location with an itinerant trade card (Reisegewerbekarte, Sec. 55 GewO) and requirements under the law on catering establishments
• mobile hairdresser: a trade, but hairdressing is a craft requiring a licence (Annex A no. 38 HwO); you clarify the requirements with the chamber of crafts beforehand

Small business, Kleinunternehmer, merchant, liberal professional: the differences

The most common confusion: Kleingewerbe and Kleinunternehmer. The small business is a question of commercial law: whether you are a merchant. The Kleinunternehmer (small business for VAT purposes) is a question of VAT: whether you have to charge it. A small trader can be a Kleinunternehmer, but does not have to be. And a GmbH or a liberal professional can also use the small business VAT exemption.

Feature	Small business	Merchant (e.K.)	Kleinunternehmer	Liberal professional
What is it?	trade without a commercially organised business operation	trader with a commercial register entry	VAT status, regardless of the legal form	liberal profession, not a trade
Legal basis	Sec. 1 (2) HGB	Sec. 1, 2, 29 HGB	Sec. 19 UStG	Sec. 18 (1) no. 1 EStG
Trade registration	yes	yes	depending on the activity	no, tax office only
Commercial register	no, voluntary entry possible	yes	irrelevant	no
Bookkeeping	cash-basis accounting, books only under Sec. 141 AO	books under the HGB, exemption under Sec. 241a HGB possible	irrelevant	cash-basis accounting
Trade tax	yes, allowance €24,500	yes, allowance €24,500	irrelevant	no
VAT	yes, unless a Kleinunternehmer	yes, unless a Kleinunternehmer	none up to the thresholds	yes, unless a Kleinunternehmer
Name	first and last name plus business designation	company name with the suffix "e.K." (Sec. 19 (1) no. 1 HGB)	irrelevant	own name

If you start a business with others and run a small business, you are a GbR. More on this at Form a GbR.

Is there a turnover limit for a small business?

No. The HGB does not give a figure. Whether a commercially organised business operation is needed depends on the overall picture: turnover, number of employees and business transactions, loans, stock, locations, customer and supplier relationships.

How the thresholds fit together:

• Sec. 141 AO applies to commercial businesses, so also to you as a small trader. If you have more than €800,000 turnover in the calendar year or more than €80,000 profit in the financial year, you must keep books for tax purposes. Cash-basis accounting is only available as long as you stay within both thresholds. The obligation only begins with the financial year following a notification from the tax office (Sec. 141 (2) AO).
• Sec. 241a HGB only exempts sole merchants, i.e. e.K., from bookkeeping under the HGB if they stay within both thresholds in two consecutive years. As a small trader, you are not a merchant, so HGB bookkeeping does not apply to you anyway.
• No switch when a figure is exceeded: If your business at some point needs commercial arrangements, you are a merchant by operation of law (Sec. 1 (1) HGB) and must register your company name with the commercial register (Sec. 29 HGB). A GbR with a commercial business is by law an OHG (Sec. 105 (1) HGB) and must be registered (Sec. 106 (1) HGB). This does not happen with the first euro above a figure, but when the business has actually changed.

Is a small business tax-free? The three taxes

No. A small business is not tax-free, not even up to €22,000 or €25,000. There are three taxes with three different thresholds that relate to different figures.

Income tax

Your profit from the small business counts towards your income, together with salary, pension or other income. Only taxable income up to the basic personal allowance of €12,348 in 2026 remains tax-free (Sec. 32a (1) EStG), double that for joint assessment (Sec. 32a (5) EStG). If you are already employed and use up the allowance with your salary, you pay income tax on every euro of profit from the side business. The tax rate rises progressively up to 42%, and at the top 45%. The tax office can set advance payments.

Trade tax

You only pay trade tax once your trade income exceeds the allowance of €24,500 (Sec. 11 (1) GewStG). Trade income is profit with certain additions and deductions. The base rate is 3.5%, and your municipality sets the multiplier. Trade tax is largely credited against your income tax (Sec. 35 EStG).

VAT and the small business VAT exemption

Your turnover is exempt from VAT if your total turnover did not exceed €25,000 in the previous year and does not exceed €100,000 in the current year (Sec. 19 (1) UStG). You then do not have to file advance VAT returns either. The downside: you cannot deduct input tax on your purchases. If you waive the scheme, this binds you for at least five calendar years (Sec. 19 (3) UStG). The frequently cited €22,000 is a former threshold. Special rules apply to the year of formation and to exceeding €100,000 in the current year.

On the invoice, as a Kleinunternehmer you must state that the tax exemption for small businesses applies to your service (Sec. 34a UStDV). A possible wording: "Steuerbefreiung für Kleinunternehmer nach § 19 UStG, es wird keine Umsatzsteuer berechnet." (Tax exemption for small businesses under Sec. 19 UStG, no VAT is charged.)

How much can I earn tax-free?

Tax	Threshold	Reference figure	What happens above it
Income tax	basic personal allowance €12,348 (2026)	taxable income from all sources	tax under the progressive scale
Trade tax	allowance €24,500	trade income of the business	base rate 3.5% times multiplier, largely creditable against income tax
VAT	€25,000 in the previous year and €100,000 in the current year	total turnover, not profit	VAT on invoices, input tax deduction, advance returns

Your tax adviser will clarify the calculation in your individual case.

What does a small business cost per month?

The small business itself has no monthly fee. You pay the trade registration fee once; how registration works is explained in the guide Registering a small business. Running costs arise from obligations attached to you as a self-employed person and from expenses you choose to incur.

Item	Mandatory or optional	What the amount depends on
Health and long-term care insurance	mandatory	main or side business, statutory or private, income
Chamber of commerce (IHK) contribution	compulsory membership if assessed for trade tax (Sec. 2 (1) IHKG)	trade income; no contribution up to €5,200 trade income; founders, subject to conditions, fully exempt up to €25,000 in the year of formation and the following year, and exempt from the levy in the third and fourth years (Sec. 3 (3) IHKG)
Chamber of crafts	mandatory in the crafts	the chamber's contribution rules
Employers' liability insurance association (Berufsgenossenschaft)	mandatory for the business	sector, risk class, employees
Pension insurance	mandatory only for certain self-employed people (Sec. 2 SGB VI)	income
Income tax, trade tax	if profit exceeds the allowances	profit, multiplier
Business account	optional, required by some banks	bank
Accounting software, tax adviser	optional	scope
Business liability and other insurance	usually optional, mandatory for some professions	risk of the activity

For a side business, the bill is often small: health insurance usually continues through your employer, and the IHK charges no contribution up to €5,200 trade income. For a full-time small business, health insurance is usually the biggest item.

Health and social insurance in a small business

How you are insured depends mainly on whether your self-employment is your main occupation or a sideline. Health insurance funds calculate contributions according to your income. Your health insurance fund will tell you the exact amount.

• Self-employed as your main occupation: You insure yourself, either voluntarily in the statutory scheme or privately.
• As a sideline alongside a job: As a rule, you remain insured through your employment. If, in terms of time and income, self-employment becomes your main activity, this changes.
• Covered by family insurance: Family insurance ends if you are self-employed as your main occupation or your total income regularly exceeds one seventh of the monthly reference amount (Sec. 10 (1) SGB V).
• Students: Here family insurance, student insurance, BAföG (student finance) and child benefit all come together. Ask your health insurance fund before you start.
• Pensioners: If you receive a reduced earning capacity pension or an old-age pension, talk to the German Pension Insurance (Deutsche Rentenversicherung) beforehand.

Most small traders are not compulsorily insured in the pension insurance scheme. Exceptions apply, among others, to craftspeople in the register of craftspeople, teachers and educators, carers, and self-employed people who do not employ any employee subject to compulsory insurance and permanently work essentially for only one client (Sec. 2 sentence 1 SGB VI). The German Pension Insurance will clarify whether this applies to you.

Obligations in a small business

• Records and profit calculation: You calculate your profit with cash-basis accounting (Sec. 4 (3) EStG) and submit it electronically (Sec. 60 (4) EStDV). You keep your receipts.
• Tax returns to the tax office: At the start, the tax registration questionnaire within one month (Sec. 138 (1b), (4) AO), then every year the income tax return with cash-basis accounting, where applicable the trade tax return (Sec. 14a GewStG), and without the small business VAT exemption, advance VAT returns and the annual VAT return.
• Invoices: with the mandatory information, and as a Kleinunternehmer with the reference to Sec. 19 UStG. You must be able to receive electronic invoices from other businesses; as a Kleinunternehmer, you may continue to issue paper or PDF invoices yourself (Sec. 34a sentence 4 UStDV).
• Name: first and last name with a business designation, no invented company name.
• Chamber and employers' liability insurance association: membership and notifications.
• What happens without turnover? Legally, nothing at first: you still file your tax return, showing a loss if applicable. If you only make losses for years, the tax office may doubt your intention to make a profit. If you give up the activity, you deregister the trade (Sec. 14 (1) sentence 2 no. 3 GewO).

Advantages and disadvantages

Advantages	Disadvantages
quickly set up, without a notary and commercial register	unlimited liability with private assets
no minimum capital	no invented company name, you appear under your own name
cash-basis accounting instead of a balance sheet	as the business grows, obligation to register as a merchant or OHG
trade tax only above €24,500 trade income	profits are taxed in full at your personal tax rate
can be combined with the small business VAT exemption	investors cannot take shares

The most important disadvantage is liability. You answer for every liability of the small business with your account, car and savings. Professional or business liability insurance covers part of this, but not payment defaults or contractual penalties. If you want to protect your private assets, the alternative is to form a UG for €259 net plus VAT, notary and court fees, IHK and the trade registration fee.

Who is a small business worthwhile for?

A small business suits you if you are starting alone or as a pair with a manageable risk, building something up as a sideline or want to test an idea. Typical examples are services, small-scale online retail and activities with low use of goods.

It is less suitable if you pre-finance larger quantities of goods, take out loans, work with high order values or liability risks, or want to bring in partners. Our guide UG or sole proprietorship compares it with the alternative with limited liability.

Registering a small business: in brief

You register a small business with the trade office of your municipality at the same time as you start the activity (Sec. 14 (1) GewO). You use the "Gewerbe-Anmeldung" form, in person or online. The municipality sets the fee. You then submit the tax registration questionnaire to the tax office. The guide Registering a small business explains the procedure, the form and special cases. Our business formation checklist gives an overview of all formation steps.

From small business to UG, GmbH or e.K.

If your business grows, you have three routes:

• Registration as an e.K.: You remain a sole proprietor, have a company name and prepare balance sheets under the HGB if you exceed the thresholds of Sec. 241a HGB. Nothing changes in terms of liability.
• Forming a new UG or GmbH: The company has limited liability. Contracts, customers and assets do not transfer automatically; contractual partners must consent to the transfer.
• Hive-down or formation by contribution in kind: As a registered merchant, you can hive down your business to a GmbH under the Transformation Act (Umwandlungsgesetz), provided your liabilities do not exceed your assets (Sec. 152 UmwG); contracts then transfer as a whole (Sec. 131 (1) no. 1 UmwG).

Old debts of the small business remain your personal debts. We support the switch with Convert a sole proprietorship into a GmbH for €1,069 net plus VAT, notary and court fees and the fee for changing the trade registration.

Setting up a small business with Recht 24/7

Starting alone or with others: we have a fixed price for both routes. A lawyer checks your name, classifies your activity and advises you on the tax registration questionnaire.