What is a sole proprietorship? Definition, features and liability

Sole proprietorship: definition in simple words

A sole proprietorship has exactly one owner. They run the business alone, receive all the profit and bear every loss. There is no separate law for it: the sole proprietorship comes into being as soon as someone takes up a self-employed activity without forming a company.

"Einzelunternehmer" (sole proprietor) is the person, "Einzelunternehmen" (sole proprietorship) the business; "Einzelunternehmung" and "Einzelfirma" mean the same. The sole proprietorship has no abbreviation of its own. A suffix only comes with entry in the commercial register: then it is "eingetragener Kaufmann" or "eingetragene Kauffrau" (registered merchant), abbreviated e.K., e.Kfm. or e.Kfr. (Sec. 19 (1) no. 1 HGB). Our formation glossary explains further terms, from Firma to commercial register.

Is the sole proprietorship a legal form?

In everyday language and in every comparison of legal forms, the sole proprietorship is listed as a legal form. Strictly speaking, it is the business form of a single natural person: the legal entity behind it is not the business but the owner themselves.

Two common confusions:

• Single-member GmbH or UG: It is not a sole proprietorship but a separate legal entity, for whose debts only the company's assets are liable (Sec. 13 (2) GmbHG). More in the guides What is a GmbH? and What is a UG?.
• GbR: If two or more people run a business together, a GbR (civil law partnership) usually comes into being, even without a written agreement. More under What is a GbR?.

The three variants: small business, e.K. and liberal professions

Small business

If, by its nature or scope, the trade does not require a commercially organised business operation, the owner is a small trader and not a merchant (Sec. 1 (2) HGB). The typical start: trade registration, no register entry, simple bookkeeping. Example: Lena sells pottery she makes herself through an online shop and at markets. She registers a trade and appears as "Lena Maier Keramik".

Registered merchant (e.K.)

If the business grows to the point where it has to be organised commercially, the owner becomes a merchant and must be entered in the commercial register (Sec. 1, 29 HGB). Small traders may register voluntarily (Sec. 2 HGB). The Commercial Code (HGB) then applies in full, with a company name (Firma) of your own and a mandatory suffix. Example: Tom runs a café with two locations, eight employees and supplier credit. A lot speaks for a commercially organised business here, and Tom trades as "Café Hafenblick e.K.". Details on types of merchant, company name and costs are on our explainer page on the registered merchant.

Liberal professions

The liberal professions are those listed in Sec. 18 (1) no. 1 EStG, such as doctors, engineers, journalists and translators, as well as people working independently in science, the arts, writing or teaching. They do not register a trade, but notify the tax office of their start within one month (Sec. 138 (1) sentence 3, (4) AO), and pay no trade tax. Example: Ahmet works alone as a translator for English and Arabic. He is a sole proprietor, but neither a trader nor a merchant.

Feature	Small business	e.K.	Liberal profession
Trade registration	yes (Sec. 14 GewO)	yes (Sec. 14 GewO)	no, notification to the tax office
Commercial register	no, voluntary entry possible (Sec. 2 HGB)	yes, division A	no
Company name or name	first and last name, business designation possible	company name freely chosen with the suffix "e.K."	first and last name, professional title
Bookkeeping	cash-basis accounting up to the thresholds of Sec. 141 AO	balance sheet, unless exempt under Sec. 241a HGB	cash-basis accounting (Sec. 4 (3) EStG)
Trade tax	yes, allowance €24,500	yes, allowance €24,500	no
IHK or HWK	member if assessed for trade tax (Sec. 2 (1) IHKG), crafts with the chamber of crafts (HWK)	member	no, depending on the profession its own professional chamber
Liability	unlimited	unlimited	unlimited

Profile of the sole proprietorship

Feature	Sole proprietorship
Owner	exactly one natural person
Legal personality	none of its own, the legal entity is the owner
Formation	taking up the activity, trade notification or notification to the tax office
Start-up capital	none required
Notary	no, only for the application to the commercial register as an e.K. (Sec. 12 (1) HGB)
Commercial register	mandatory for merchants by trade (Istkaufleute) (Sec. 29 HGB), voluntary for small businesses (Sec. 2 HGB)
Name	without an entry, first and last name plus business designation, as an e.K. a company name
Liability	unlimited, with all assets
Taxes	income tax, trade tax for a trade, VAT or small business VAT exemption
Bookkeeping	cash-basis accounting; for a trade, balance sheet only after notification by the tax office above €800,000 turnover or €80,000 profit (Sec. 141 AO), as an e.K. under Sec. 241a HGB
Trade registration	yes for a trade, no for a liberal profession
IHK or HWK	yes for a trade, no for a liberal profession
Price at Recht 24/7	€259 net plus VAT and the trade registration fee

Liability: why you are liable with your private assets

Because there is no business separate from you, nothing separates business and private assets. Every debt of the business is your debt, for example:

• Loan: If business goes badly, the bank can access your private account, car or home for the machinery loan.
• Supplier: If an invoice for goods remains unpaid, the wholesaler enforces against you personally.
• Damages: For a mistake in a customer job, you are liable with everything you have.

How to limit the risk without changing the business form:

• Contracts: Agree limitations of liability. In terms and conditions, this is only possible within limits, for example not for personal injury and gross negligence (Sec. 309 no. 7 BGB). Terms and conditions from a lawyer: Have terms and conditions drafted for €499 incl. VAT.
• Insurance: Professional or business liability insurance covers many claims, but not loans, rent or unpaid invoices.
• Change of legal form: If the risk grows, a UG or GmbH protects your private assets; with little capital, for example the UG for €259 net plus VAT, notary and court fees, IHK and the trade registration fee.

Name of the sole proprietorship

Without an entry in the commercial register, you appear under your first and last name. You may add a business designation, such as "Lena Maier Keramik" or "Jonas Berger Fahrradservice". Only a merchant has a company name (Firma) in the legal sense, i.e. a trade name of their own (Sec. 17 (1) HGB). A purely invented name such as "Nordlicht Design" is therefore only possible as an e.K., and then with the suffix "e.K.". Anyone who appears like a company name holder without being registered risks an administrative fine from the register court and injunctive claims (Sec. 37 HGB).

Mandatory information you need from the start:

• Invoices: full name and full address (Sec. 14 (4) no. 1 UStG).
• Website: legal notice (Impressum) with name, address and email address (Sec. 5 (1) DDG).
• As an e.K.: on business letters, also the company name with suffix, place of business, register court and register number (Sec. 37a (1) HGB).

More important than the form is that your name does not infringe someone else's trade mark or company name. If you want to protect your name yourself, you can do so with a trade mark application from €239 net plus VAT and official fees.

When does a sole proprietorship have to be entered in the commercial register?

As soon as your trade, by its nature or scope, requires a commercially organised business operation (Sec. 1 (2) HGB). You are then a merchant and must apply for entry of your company name, place and business address (Sec. 29 HGB). If you fail to do so, the register court can compel you with coercive fines of up to €5,000 each (Sec. 14 HGB).

The law does not set a fixed turnover threshold. What matters is the overall picture, for example based on these criteria:

• amount of turnover and business assets,
• number of employees,
• number and variety of customers, suppliers and business transactions,
• credit transactions, stock and pre-financing,
• several locations or business areas.

The turnover and profit thresholds in Sec. 241a HGB and Sec. 141 AO only concern bookkeeping, not the question of whether you are a merchant. Liberal professionals do not carry on a trade and are therefore not entered as an e.K.

Taxes and bookkeeping at a glance

• Income tax: The profit is taxed with you personally at your income tax rate.
• Trade tax: only for a trade, not for liberal professionals. Trade income is reduced by an allowance of €24,500 (Sec. 11 (1) sentence 3 no. 1 GewStG). Income tax is reduced by four times the trade tax base amount (Sec. 35 (1) no. 1 EStG), so that trade tax is largely credited.
• VAT: As a small business, your turnover is exempt from VAT if 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).
• Bookkeeping: Traders become obliged to keep books if they have more than €800,000 turnover or more than €80,000 profit a year; the obligation only begins after a notification from the tax office (Sec. 141 (1), (2) AO). Cash-basis accounting is therefore only sufficient as long as you stay within both thresholds. Registered merchants are only exempt under Sec. 241a HGB if, on two consecutive balance sheet dates, they have no more than €800,000 turnover and no more than €80,000 annual net profit; for a new business, the first balance sheet date is sufficient. Liberal professionals do not fall under Sec. 141 AO and can always use cash-basis accounting (Sec. 4 (3) EStG).

This overview is no substitute for tax advice; clarify what pays off for you with your tax adviser.

Advantages and disadvantages of the sole proprietorship

Advantages	Disadvantages
no minimum capital, no notary, no articles of association	unlimited liability with private assets
for activities not requiring a permit, usually ready to start in 1 to 3 days	no partners or investors without changing the legal form
all decisions alone, without a shareholder resolution	if the owner is unavailable, the whole business is affected
profit can be withdrawn freely at any time	profit is always taxed in full at the personal income tax rate
cash-basis accounting up to €800,000 turnover and €80,000 profit	without an entry, no invented name as a company name
trade tax allowance of €24,500 and credit against income tax	with large customers and banks, sometimes less weight than a GmbH
switching to a UG or GmbH remains possible later	switching takes effort, contracts do not transfer automatically

Whether a sole proprietorship or a UG suits you better depends mainly on liability risk and profit. You can find a direct comparison with a worked example in the guide UG or sole proprietorship.

Employees, business account, side business

Employees: Yes, a sole proprietorship can employ staff. You are then an employer with all the obligations, for example for social security and wage tax. You cannot employ yourself, because you cannot conclude an employment contract with yourself.

Business account: There is no law requiring sole proprietors to have a separate business account. A separate account is still sensible, because it makes bookkeeping easier. Some banks exclude business use of private accounts in their terms.

As a side business: This is also possible alongside employment. Check whether your employment contract requires you to notify your employer of secondary activities, and clarify any contribution consequences with your health insurance fund.

How a sole proprietorship comes into being

1. Check permits: Some activities need a permit or entry in the register of craftspeople (Handwerksrolle) before you start.
2. Register: Notify the trade office of your municipality of the trade (Sec. 14 GewO); as a liberal professional, notify the tax office that you have started (Sec. 138 (1) sentence 3 AO).
3. Tax questionnaire: Within one month, you submit the tax registration questionnaire to the tax office (Sec. 138 (1b), (4) AO), in which you also decide on the small business VAT exemption.
4. Chamber: Traders become members of the chamber of commerce (IHK) or the chamber of crafts.

The full process with documents and costs is described in the service Set up a sole proprietorship, and the comparison of all routes in the guide Starting a business.

Debts, insolvency, death: what happens to the sole proprietorship

Debts and insolvency: There is no duty to file for insolvency for sole proprietors as there is for a GmbH or UG; Sec. 15a InsO only applies to legal entities and certain companies. If you are unable to pay, you can apply for proceedings to be opened yourself; as long as you are self-employed, regular insolvency proceedings apply. Consumer insolvency proceedings are only open to formerly self-employed people if they have fewer than 20 creditors and no debts from employment relationships (Sec. 304 InsO). Discharge of residual debt is possible after an assignment period of three years (Sec. 287 (2) InsO). In a crisis, get advice on your individual case early.

Giving up the business: You deregister the trade with the trade office (Sec. 14 (1) sentence 2 no. 3 GewO); you notify the tax office that you have given up a liberal professional activity (Sec. 138 (1) sentence 4 AO). As an e.K., you also register the extinction of the company name with the commercial register (Sec. 31 (2) HGB).

Death of the owner: The sole proprietor's assets pass as a whole to the heirs (Sec. 1922 BGB), with all the debts of the business (Sec. 1967 BGB). Anyone who does not want this can disclaim the inheritance within six weeks (Sec. 1944 BGB); more in the guide Disclaiming an inheritance. If the heirs continue the commercial business of an e.K. under the existing company name, they are also liable for the old business debts under commercial law; they avoid this if they discontinue the business within three months (Sec. 27 HGB).

From sole proprietorship to UG or GmbH

Switching is usually worthwhile when the liability risk rises, partners join or profits are to stay in the business. There are three routes: a new formation with individual transfer of contracts and assets, a contribution in kind of the business (only for a GmbH, not for a UG, Sec. 5a (2) GmbHG) or, as a registered merchant, a hive-down of the business as a whole (Sec. 152 UmwG), which is not possible if your liabilities exceed your assets.

We support the switch to a GmbH 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.