Sole proprietor / sole proprietorship

The sole proprietor is one of the simplest and most frequently chosen legal forms for business activities in Germany. In this article, we will look in detail at the concept of a sole proprietor and distinguish it from a registered trader.

Definition of the sole proprietor

A sole proprietor is a natural person who carries on a business or freelance activity in his own name and for his own account. It is a legal form in which there is no separation between the assets of the company and the personal assets of the entrepreneur.

Establishment of a sole proprietorship

The establishment of a sole proprietorship is relatively straightforward. No minimum capital contribution is required and the entrepreneur can start business immediately. Depending on the type of business, a business registration may be required at the relevant trade office. Freelancers are exempt from business registration, but may have to register their activity with the tax office.

Liability of the sole proprietor

An essential aspect of the sole proprietorship is unlimited liability. The sole proprietor is liable with all his assets, both business and personal, for the liabilities of the company.

Tax aspects

A sole proprietor is subject to income tax on the profits of the business. It is important to know and take into account the tax obligations, especially with regard to sales tax and business tax.

Bookkeeping and accounting

A sole proprietor is generally entitled to keep single-entry bookkeeping, unless he exceeds certain turnover and profit limits, in which case he is obliged to keep double-entry bookkeeping.

Difference from registered trader

The registered merchant (e.K. or e.Kfm.) is a special form of sole proprietor who is entered in the commercial register and operates a commercial business. The main difference is that the registered merchant is subject to the commercial law regulations of the German Commercial Code (HGB), while the sole proprietor is primarily subject to the regulations of the German Civil Code (BGB).

A registered merchant must also keep double-entry accounts and is required to prepare more formal financial statements than a sole proprietor.

Advantages and disadvantages of the sole proprietor

Advantages:

• Simple foundation
• Full control over the company
• Reduced accounting obligations (except when certain limits are exceeded).

Disadvantages:

• Unlimited liability
• Possibly less prestige in business dealings compared to corporations

Relevance for corporate strategy and decision between sole proprietorship and corporation

The choice of legal form is a fundamental decision that can have a significant impact on corporate strategy. While the sole proprietorship may be suitable for smaller, less complex business models, corporations such as the GmbH or AG offer limited liability and can provide more credibility in business dealings in certain cases.

It is important to understand the differences between a sole proprietorship and a corporation. Corporations typically require a minimum capital contribution and are subject to more stringent regulatory requirements, but offer the advantage of limited liability, which means that the entrepreneur’s personal assets are protected in the event of corporate debt.

Final thoughts

The decision whether to operate as a sole proprietor or to form a corporation must be carefully considered. It is advisable to look into the various options at an early stage and, if necessary, seek expert advice. Choosing the right legal form is critical to the success of the business and can have long-term implications.

Please note that this article contains general information and does not constitute legal advice. It is recommended to seek professional assistance for legal issues.