You have a business idea and want to start your own business? Maybe you already have a concrete business plan, clients who have approached you or maybe you somehow got into self-employment?
Then you’ve probably wondered if you don’t have to register somewhere. This article is about exactly that. Together we will go through the complete legal process of setting up a business and check where you should register your business and what certificates and proof you need to do so.
Most founders have already heard something about the business registration and therefore think first of registering a business. But here many already commit the first mistake. Because there are situations in which a business registration is simply wrong and can later become a disadvantage for you.
Therefore, in our step-by-step instructions, we start one step before that.
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Legal forms when registering a business
Before we start with the first step mder business registration, I should address the issue of legal forms. This article is primarily aimed at sole proprietors who want to register their business. Since the start-up processes can be very different for the different legal forms, this guide would confuse more than help if I tried to discuss all legal forms in one go.
Essentially, a distinction is made between sole proprietorships, partnerships and corporations.
Variations in the number of partnerships
Partnerships are almost always founding teams in which all founders (= partners) want to actively participate and plan to build up a company together. The best-known legal forms are the GbR (partnership under civil law), the OHG (general partnership) and the KG (limited partnership).
The main difference to a sole proprietorship is – what a surprise – the number of founders. The process of registering a business is very similar to that of a sole proprietorship. In addition, there is the agreement and involvement of the founders. Or in short: before the actual registration of the business, the founders need a partnership agreement, in which duties, tasks, risks and profit distribution are regulated.
Depending on how elaborate the chosen legal form is (GbR = very lean, KG = many legal requirements), more or less legal formalities have to be fulfilled in the process.
Do your thing, not your taxes
deviations in the case of corporations
Corporations differ significantly in their legal structure from sole proprietorships.
When you establish such a company, you are legally creating a completely new entity. For this reason corporations are also called legal entities. These persons can participate independently in business transactions and you could even conclude legal transactions with your corporation yourself. Such a thing would be unthinkable with a sole proprietorship.
The most common corporations in Germany are the UG (entrepreneurial company) , the limited liability company (GmbH)) and the AG (stock corporation) .
In order to create such a legal entity, you definitely need a notarized founding contract and also the opening of a business account and the registration in the commercial register at the local district court are significantly more complex. If you plan to establish a corporation, the following text will not really help you.
Normally, the notary who takes care of the notarization of the articles of association will also help you with all other questions concerning the formation of a company. If you don’t know anything about the subject, you should look for a notary who is part of a group of firms in which tax advisors are also active. Through such a merger, you have all the contacts in one place and can be sure that all aspects of the incorporation are taken care of.
Step 1: Check whether you need a business registration at all
Not every 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 "income from trade".
Basically, there are two reasons that could cause the tax office not to consider your business as a trade. This is always the case if
- the the nature of your activity is not a commercial activity or
- you with your self-employment you do not want to make a profit .
Nature of your activity
Freelance activities are not subject to the trade regulations and therefore do not have to be registered as a trade. So if you are a freelancer, you can stop reading here. You neither have to register a trade nor do you have to pay trade tax later on.
However, it is not always possible to make a clear distinction between which professions are classified as freelance activities and which are classified as commercial activities. In §18 EStG (Income Tax Act) some professions are listed, which are always considered as freelance (so-called catalog professions):
- Doctors, dentists and veterinarians
- Lawyers, patent attorneys and notaries
- Surveyors and engineers
- Certified public accountants, tax consultants, sworn auditors
- alternative practitioners and physiotherapists
- Journalists, interpreters and photojournalists
- other professions
In addition, there are professions with similar tasks and activities that are scientific, artistic, literary, teaching or educational.
As you will surely notice, these legal regulations leave a lot of room for interpretation and there are professions that cannot be clearly classified as freelance.
Tip The Federal Association of Liberal Professions (Bundesverband der Freien Berufe) will be happy to help you with the question of whether your activity is freelance. Another possibility would be to write directly to the tax office, describe the facts of the case and ask for a binding assessment. In doing so, you should make sure that you apply for a binding information according to § 89 AO ask, because otherwise the tax office may change its mind.
The differentiation between commercial and freelance activity is decisive, above all, because of the trade tax. Freelancers are generally exempt from paying trade tax and therefore do not have to file a trade tax return.
This does not mean, however, that professionals actually have to pay more taxes in total. Since the trade tax paid can almost completely be credited against your private income tax return, the bottom line is that the trade tax obligation only ensures that tradesmen have to pay trade tax to the responsible municipalities and in return pay the (almost) same amount less income tax.
At first glance, this whole procedure seems typically German and bureaucratic. And in fact the whole thing has purely political reasons. The trade tax is fully due to the municipalities in which the trader is based. Income tax, on the other hand, is a shared responsibility of the federal, state and local governments.
Since the municipalities will probably not give up their most important source of income in the coming years, nothing will change in the current system in the near future.
Registration as a freelancer
The fact that freelancers do not have to register a business does not mean that they do not have to worry about anything. You can only save yourself the trip to the trade licensing office.
Instead, you should go directly to step 5 and fill out the tax registration questionnaire and send it to the tax office. As a freelancer, you must do this independently, since the tax authorities, unlike those of tradespeople, will otherwise not find out about your start-up.
An entry in the commercial register is also not necessary for freelancers. If a freelancer’s business grows to such an extent that it requires a "business operation set up in a commercial manner", it is usually no longer a freelance activity but an entrepreneurial activity. In this case a trade would have to be registered. When this will be the case, you will find out below in the section on the commercial register.
Most freelancers are not mandatory members of the Chamber of Industry and Commerce or the Chamber of Crafts, as many professions have their own chambers (e.g. Chamber of Lawyers, Chamber of Architects or Chamber of Tax Advisors).
Self-employment without the intention of making a profit
If you earn money with a hobby, you do not necessarily have to register a business. You are only considered to have a trade if you actually intend to make a profit and carry out your activity on a permanent basis.
So if you like to write in your spare time and publish your texts in your private blog, you are not a business. Nor if you receive occasional donations or other contributions from loyal readers, but these never cover your expenses.
In this case, the tax office speaks of hobby and classifies the activity as a hobby. If one or the other Euro is made in the process, this is basically unproblematic, as long as you do not make any permanent profits. However, you are not allowed to claim the costs for webhosting, programming or photo rights as business expenses.
Attention: You are already self-employed if.
In recent years, the Internet in particular has made many constellations possible in which people initially pursued only a hobby and later not only generated income but also (high) profits.
Basically, you can assume that you are self-employed, if you perform an activity permanently and thereby generate an income. You have to register this activity in any case and pay tax on the income. This applies to YouTubers, to bloggers with business-oriented blogs, to Instagram channels financed by advertising bookings, or to online retailers on eBay, Amazon, or niche sites such as Kleiderkreisel, for example.
If you are self-employed with your online activity, you should definitely deal with the issue and register your self-employment. A tax audit after the fact can be really expensive.
The big misconception about small businesses
I keep hearing and reading the question of how to register small businesses. Often the question is then accompanied by a discussion about tax exemptions or tax relief for small business owners.
I don’t know where the myth comes from, but a small business is no other business and the registration runs exactly like any other business. In principle, there are no tax breaks either.
It goes even further: The word small business does not exist in tax and commercial law.
If you search for a definition of small business, you will mainly find the interpretation that small businesses are companies that are not covered by the commercial law. This refers to companies that are run as sole proprietorships and do not have to be managed commercially. This can be assumed if your turnover is less than 250.000 Euro and you employ less than 5 people.
However, this does not matter for the business registration. Even small businesses must register a trade and declare it to the tax office. Only the registration in the commercial register can be waived.
Confusion with the small business regulation
Occasionally, a small business is also confused with the small business regulation.
The small business regulation, which only applies to sales tax, has nothing to do with a specific type of business and must not be confused with the above definition.
The small business regulation frees small businesses from the red tape associated with sales tax accounting and advance sales tax returns. Small entrepreneurs do not charge sales tax (= value added tax) and in return are not allowed to claim input tax either.
The small business regulation can be used by any company that meets the following two requirements:
The Turnover in the previous year lay under 22.000 (since 01.01.2020, previously the limit was 17.500 Euro). The Turnover in the current year lies Expected to be under 50.000 euros
The small business regulation is applied for using the tax registration questionnaire when registering with the tax office (see step 5).
- Freelancers do not need to register a business, they only need to register with the tax office.
- Everyone else must register as a business, even if it is only a sideline activity.
- You will be considered a business sooner than you think. As soon as you earn money sustainably with an activity, you should check whether you are considered self-employed by the tax office.
- The small business regulation has nothing to do with a so-called small business. Small business owners must also register a business.
Step 2: The right time – when to register the business?
After we have clarified who has to register a business in the first place, we turn to the question of when the business should be registered.
In principle, several points in time would come into question, because a company does not come into being overnight and it is difficult to determine the one first day. Conceivable (and unfortunately also observed in practice) are the following points in time:
- The day when the business idea was born.
- The date on which the business plan was drawn up.
- The day on which the first contracts are concluded.
- The day when the first revenues flow in.
- The day when the first expenses are made.
- Shortly before the first tax return has to be made.
- Later dates on which certain turnover limits are reached.
The trade regulations provide clear rules for this: A trade must be registered as soon as a commercial activity is started.
The business registration has to be done between point 2 and 3. The business idea and the business plan are important, but are not yet part of the actual commercial activity. However, as soon as you appear as a self-employed person, conclude contracts or make investments, you are already doing business. You should register your business beforehand.
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 you have to indicate your tax number. For example, you need your tax number to write correct invoices. However, you will receive these only after you have registered the business 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 you start your self-employment. You should also indicate this date in the business registration form.
Expenses before registering your business
Even though it makes sense to register your business as early as possible, expenses often arise before you register your business. Founders can claim these costs as anticipated business expenses at the tax office and thus reduce their later business profits and save income tax.
Basically, all expenses can be deducted that are related to the founding of the company and the future business. These include, for example, travel costs, visits to trade fairs, but also technical literature and consulting costs incurred by start-up consultants, lawyers or tax advisors.
Since costs must be claimed for tax purposes in the year in which they are incurred, it would be easiest if you register your business in the year in which the first costs are incurred.
However, the Federal Fiscal Court has already confirmed several times that expenses can also be recognized that were incurred up to three years before the business registration. For this, you should keep all receipts and proof of payment (bank statements) and carry out an appropriate profit calculation (usually a surplus income statement).
- You should register your business before you start your business activity.
- Failure to register a business can result in a fine of up to 3600 euros. As a rule, you should register your business too early rather than too late.
- Even before registering your business, you can deduct all expenses related to the establishment of your business and your future self-employment. Condition here: you must not be older than 3 years.
Step 3: What you should do before registering your business
Anyone who goes to the Trade Licensing Office completely unprepared and believes that they will receive their trade license immediately is often disappointed. In many industries and areas, you need certain licenses and permits to open a business and become active.
In order to save you an unnecessary trip to the trade office, you should find out beforehand whether you need certain licenses for your business idea. An exhaustive list of all permits would go beyond the scope here, so we focus on the most common concessions:
- In addition to an operating license from the local regulatory authority, restaurateurs also need a license to serve alcohol (formerly known as a liquor license). Also a health certificate, which can be made at the health department, should be proved.
- Craftsmen need a craftsman’s card or a business card for businesses similar to craftsmen, which you can get at the Chamber of Crafts and Trades.
- Insurance brokers and financial investment advisors need a permit from the responsible IHK before registering a business
- A license is also required for commercial passenger transport (for example, cab and bus drivers), which you must apply for at the Trade Licensing Office or the Regional Council.
- If you want to start your own business as a security service in property and personal security, you need a permit before you can register your business
- Nursing services
- Personnel services and employee leasing
- Arms trade (incl. ammunition, explosives and poisons)
- Operation of gambling halls
The specific licensing requirements differ from region to region. In principle, the trade regulations are always binding, but can be supplemented locally by ordinances.
On the whole, these are proofs of professional knowledge and personal suitability (for example, no criminal record). In some cases, certain spatial conditions must be proven (Ex: gastronomy).
Foreign nationals should additionally note that they must present a residence permit from the relevant immigration authority. This permit must explicitly state that you have permission to carry out a business activity (work permit).
In order to clarify in advance which certificates and permits you need to register your business, it is best to contact the trade office directly or take advantage of advice from the local Chamber of Commerce and Industry.
- In many industries, you need permits and concessions to register a business.
- Find out beforehand what the requirements are in your industry and what concessions you need for self-employment. A quick call to the IHK or the trade office should give you a first impression.
Step 4: The business registration
As in many areas of life, good preparation is already half the battle. After you have clarified whether you need to register a business and gathered all the necessary concessions certificates, we come to the actual business registration. This step is done very quickly if you have everything well prepared.
It is advisable to download the business registration form before the actual date and 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 make a note of the questions in advance and clarify them with the clerk at the trade office.
You should research which authority is responsible for registering your business on the Internet beforehand. Depending on the state, business registration is done by the municipality or the chamber of commerce or. adopted by the Chamber of Crafts.
In Bavaria, Hamburg and Rhineland-Palatinate, for example, the chambers are responsible, while in most other federal states the municipalities where the business is to be established are responsible.
The trade must always be registered by the trader himself/herself. This means that as a sole proprietor you have to go to the office yourself. If you set up a partnership or corporation, the respective partners or managing directors must carry out the business registration.
At the actual appointment you hand in the "business registration form" with all additional required certificates to the clerk of the business office. You can usually take your trade license with you immediately. Strictly speaking, the trade license is only the application form that has been signed and stamped. For you it is the official permission to carry out your trade.
Business registration form
The form "Business registration according to § 14 GewO or § 5c GewO" with which every founder registers his business, consists of only one page is quite self-explanatory. The founder must provide information on the following two points in particular:
- Information about the owner of the business (name, address, nationality, etc.).)
- Information about the business (address, legal form, contact details, business purpose etc.).)
Business idea or. registered activity
To register your business you need to specify what activities you want to perform. Examples are "production of furniture", "electrical installation and electrical retail trade", "wholesale trade with food" etc.
From my own experience I can tell you that it is highly recommended to formulate the business purpose as generally and broadly as possible. Since you have to inform the Trade Licensing Office of any change in your business, it can be very annoying if you are too specific in this field.
Instead of the business purpose "Development and sale of the iOS app Ping Pong Hero" it would be better to write "Development and distribution of various applications including all auxiliary business". Such a broad formulation gives you more freedom in your activities later on and you don’t have to run to the trade office again so quickly to change the business purpose.
Name of the company
By the way, the name of your company does not matter if you register a business as a sole proprietor and do not register in the commercial register. Your company’s name is always the same as yours in purely legal terms. So your bills always have your name on them and not a made up fantasy name.
Of course, you can still come up with any brand and, for example, register a domain under this name or create a bell sign. In business practice, however, this name has no serious (legal) significance. So do not take too long to find a name for your business.
Register sideline small business
In the form for registering your business, you must specify, among other things, whether you want to start your business as a sideline or as a full-time business. As a rule of thumb, you should remember that anything less than 18 hours of work per week is considered a sideline. In addition, the secondary activity may not be more extensive than your main occupation.
The classification is especially relevant for the statutory social security institutions, since you do not have to pay compulsory contributions for your part-time self-employment. You already pay the contributions within the scope of your main activity.
Register your business online
Whether you have to appear in person at the Trade Licensing Office depends on your municipality.
Up to now, only Berlin has managed to register the complete business online. For this you have to use the online form offered for this purpose: Register your business online.
In other municipalities it is only possible to fill in the form to register your business online. For the personal signature you need then however again a date with the responsible authority. Again in other municipalities it is possible to send in the form by mail. You save the way to the trade office and can use your time more sensibly.
In the future, it will probably be possible in every municipality to register your business online. However, it is not yet foreseeable how long this will take.
Costs of the business registration
How expensive it is to register a business depends on where you live. The costs for registering your business are determined by your municipality and range from 10 to 60 euros.
However, this only includes the pure business registration with the municipality or the IHK/HWK. Since in many industries you need to obtain various documents and certificates before registering your business, the cost of setting up the entire business can be significantly higher.
- The business registration has to be done at your municipality or at the local IHK/HWK (Chamber of Commerce and Industry).
- In some communities it is already possible to register a business by mail or online. But the easiest way is usually the personal appointment with the responsible authority.
- It is best to fill out the business registration form beforehand and bring it with you to the appointment: Business Registration Form .
- To register your business you must expect costs of about 20-60 euros
- Documents: You need your identity card or your tax number. Passport, all necessary permits (see step 3) and the completed form to register your trade
Step 5: What you have to do after registering your business
After you have registered your business, not everything is done yet. You only have your trade license, but you still need different numbers and proofs.
As soon as you register a business, the tax office and the responsible Chamber of Industry and Commerce (IHK) or the Chamber of Industry and Commerce (KIC) will be notified. informing the Chamber of Crafts (HWK) that there is a new business establishment. In addition, the State Statistical Office and the Trade Inspectorate will receive notification that you are now operating a business.
You do not have to do anything for these registrations. The authorities that need more information from you will contact you by mail.
Registration at the tax office
As soon as the tax office is informed about your self-employment, they will send you a questionnaire for tax registration, which you have to fill out and return. If you want to speed up the whole process, you can download the questionnaire, fill it out yourself and send it to the tax office without being asked to do so.
When the tax office has all the information from you, you will receive a tax number for your income tax, trade tax and sales tax. Since you need this tax number to write correct invoices, it should be in your interest to fill out the tax registration questionnaire as soon as possible and send it back to the tax office.
As soon as the registration with the tax office is completed, your business is registered and you can start your work.
Do I need a tax consultant?
There is no tax advisor obligation and you may also take care of all tax matters yourself.
Whether it actually makes sense to do the company registration, bookkeeping and tax returns yourself depends on how much you know about the subject and how much money you have at your disposal.
Basically, however, the subject of taxes is not witchcraft and is quite easy to understand for everyone after a certain period of familiarization. In addition, I think it is very important that you, as a self-employed person, deal with your numbers and do not give your financial management out of your hand under any circumstances. And this also includes the topic of taxes. A good tax advisor sees it the same way and is a kind of sparring partner who keeps the biggest hassle away from you.
If you have questions about the tax registration questionnaire, you do not necessarily need to contact a tax advisor. Sometimes it also helps to call the tax office and ask for information. If you have any difficulties in understanding, the clerks will usually be happy to help you. After all, an incorrectly completed tax office registration also means more work for them.
Chamber membership with the IHK/HWK
Not only the tax office will be notified when you register a business. The responsible chamber also receives a notification from the trade office and then sends you a registration form, which you should fill out and submit. In most cases, either the Chamber of Industry and Commerce (IHK) or the Chamber of Crafts (HWK) is responsible for you.
Basically, there is a compulsory membership in the respective chamber in Germany and you cannot choose whether you become a member. This IHK obligation is always hotly debated and rejected by many self-employed people. However, the discussion (so far) leads nowhere and you should focus your energy on something else, especially in the phase of founding a company.
The Chamber of Industry and Commerce always organizes seminars for start-ups Networking events for entrepreneurs, where you can participate free of charge as a self-employed person. In addition, the IHK is responsible for the implementation of vocational training and is your first point of contact if you are looking for an apprentice.
The amount of the IHK fees depends on the size of your company (turnover and profit) and must be paid annually. For small businesses the membership is free of charge if the profit is up to 5200 Euro per year. Even start-ups do not have to pay contributions for the first two years if their annual profit is less than 25.000 Euro.
Entry in the commercial register
You only have to be entered in the commercial register if your company requires a business operation set up in a commercial manner in terms of its type or scope (definition from the Commercial Code).
This formulation leaves room for interpretation and ensures that it is not always entirely clear who exactly has to register in the trade register. It must be decided on a case-by-case basis whether your company is large enough to be considered a business operation.
To do this, you should pay particular attention to the following Criteria looked:
- Amount of turnover
- 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 determine whether your company must be managed commercially (and thus whether you must be entered in the commercial register). As a rule of thumb in practice, it has been found that you are a commercially managed business if you have a turnover of more than 250.you have an annual turnover of EUR 000 and employ five people. If you are below these limits, you do not need to deal with the trade register.
If you are unsure and come close to the limits, you can contact the relevant Chamber of Industry and Commerce or. Contact the Chamber of Crafts and ask for an assessment.
Attention If you do not set up a sole proprietorship but a general partnership (OHG), limited partnership (KG) or a corporation (UG), limited liability company (GmbH) or stock corporation (AG), you must always register in the commercial register – regardless of your turnover or number of employees.
Other registrations after you have registered your business (business registration)
With the business registration, the registration at the tax office, the membership at the IHK or the membership at the Chamber of Commerce. HWK and the commercial register entry you have covered the most important points of the foundation.
However, you will find out that this is not the end of the story and that other institutes, associations and authorities will contact you and want to receive registrations and information from you.
Here you should always check in each individual case whether there is actually a legal obligation and whether you have advantages through a registration. Because there are certainly companies that take advantage of the confusion that breaks out in many newly founded companies, and want to force some kind of paid memberships on you right after your foundation.
Employer’s liability insurance association – statutory accident insurance
Every company in Germany must register with the employers’ liability insurance association. The employers’ liability insurance association (Berufsgenossenschaft) is the statutory accident insurer and takes care of all occupational accidents, occupational diseases and work-related health hazards in Germany.
Most industries have their own employers’ liability insurance association. First of all, you should find out which trade association is responsible for you and, after you have registered your trade, register with this trade association. The registration should take place within seven days after you have registered your business.
You can find more information about which professional association is responsible for you on the website of the DGUV – Deutsche Gesetzliche Unfallversicherung (German Social Accident Insurance).
Federal Employment Agency
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 will need this company number in order to prepare the payroll for your employees. You should therefore not delay this application too long, otherwise your employees will have to wait for their salaries.
As a self-employed person, you are no longer a compulsory member of the statutory health insurance fund. Even if this point is not directly related to the business registration, you should think about whether you want to be exempted from the statutory health insurance and take out private insurance.
Since the contributions to private health insurance are not based on your income, it could be financially worthwhile to switch to private health insurance.
- With a single registration at the trade office it is not yet done. New companies must also be registered with the tax office, the relevant chamber and the statutory accident insurance. Employers should also register with the Federal Employment Agency.
- The tax office and the Chamber of Industry and Commerce (resp. HWK) will be informed about the start-up by the trade office and will contact you without your intervention.
- Since you need a tax number to write invoices, it should be in your interest to speed up the registration with the tax office. If you are in a hurry, you can download the tax registration questionnaire here and send it to your tax office without being asked: Tax Registration Questionnaire
- If your company has a certain size, you have to register it in the commercial register.
Re-registering or deregistering a trade
Finally, let’s take a brief look at the end of your self-employment and clarify how to re-register or deregister your business.
In principle, you must notify the Trade Licensing Office of any change that affects your business. This concerns both the termination of your self-employment, as well as a move (relocation of the registered office) or a change in the field of activity.
The re-registration works almost the same way as registering your business. Most trade offices have specific forms that you have to fill out for re-registration or deregistration. The easiest way to do this is to make an appointment in person and bring your identity card or passport with you. you should bring your passport and your trade license with you.
You will have to pay a fee of 20 to 40 euros for the administrative effort. However, many trade offices waive fees completely and the deregistration is free of charge.
As with registering your business, you do not need to inform the tax office separately, as all information is passed on to the tax office by the business office.
Note You should note that in many cases your licenses expire when you deregister your business. If you only want to pause your self-employment, you should inform the Trade Licensing Office that you are taking a temporary break. Deregistration could be significantly more work if you have to reapply for all permits a few months later.