Sole proprietorship in Germany: what it is and how to start one

Looking to set up your own business with minimal admin? Becoming a sole trader offers one of the simplest ways to get started. In this step-by-step guide, you'll learn how to register, what to expect, and how this business model compares to others like a limited company or LLP.

If you want a full overview of all business structures available, see our main guide: Business structures in Germany: your guide to making the right choice.

Summary

1. What is a sole trader and who is it suitable for?
2. Legal foundations and differences within sole trader businesses
3. Sole trader, Ltd or LLP? A quick overview
4. How to set up as a sole trader
5. Setup costs
6. Liability explained
7. Taxes and accounting
8. Useful tips for getting underway
9. Conclusion: your journey into self-employment starts here
10. FAQ: your key questions answered

What is a sole trader and who is it suitable for?

A sole trader is someone who runs their own business and takes full responsibility for it – from invoices to income. It’s a great choice for freelancers, tradespeople, and service providers. You don’t need start-up capital, can begin trading straight away, and stay fully in control.

Your benefits:

• Flexible and straightforward setup: Registration is quick, with minimal formalities.
• Full control: You make all decisions yourself and don’t have to share profits.
• Simple administration: Compared to limited companies, bookkeeping is often easier and more cost-effective.
• Low startup costs: No minimum capital required and manageable fees.

Your risks:

• Unlimited liability: You are personally and fully liable with all your private assets for any business debts.
• Sole dependency: All tasks, decisions, and risks rest solely on you.
• Limited financing options: Banks often prefer limited companies for loans, as risk is more contained.
• Significant entrepreneurial risk: Losses can affect your personal assets, potentially leading to serious financial consequences.

Legal foundations and differences within sole trader businesses

A sole trader business includes various forms that mainly differ in legal requirements and obligations.

Small business (Kleingewerbe): Small, mostly part-time enterprises with simplified bookkeeping and fewer administrative duties. A small business is often the entry point for the self-employed with low capital needs.

Fully merchant sole trader (Vollkaufmännisches Einzelunternehmen): Businesses requiring a commercial organisation must register with the commercial register (Companies House equivalent) and are considered merchants. This entails expanded bookkeeping duties and business naming requirements (e.g., the use of "registered merchant" suffixes).

Freelancers (Freiberufler): Individuals performing certain self-employed professions (e.g., doctors, lawyers, artists) are not classified as traders. They are not required to register a business and benefit from simplified tax regulations.

Registration in the commercial register

• Small business operators are not required to register in the commercial register.
• Fully merchant sole traders are legally obliged to register their enterprise.
• Registration typically requires adding the suffixes "registered merchant" (e.K.) or "registered businesswoman" (e.Kfr.) to the business name.

Liability and company designation

Regardless of the business form, sole traders have unlimited personal liability with all their private assets. Merchants must clearly indicate their business form to prevent confusion and legal uncertainties.

Sole trader, Ltd or LLP? a quick overview

Here’s a brief look at how the main legal structures compare – so you can decide what suits you best. 

Sole proprietorship: you start and run the business alone, no starting capital is required, you are personally liable, and the setup is quick and straightforward.

Limited liability entrepreneurial company (UG): also suitable for a single founder, requires a low minimum share capital starting at €1, liability is limited to company assets, but the setup involves more formalities than a sole proprietorship. Learn more in our blog post.

Limited liability company (GmbH): Requires a minimum share capital of €25,000, liability is limited to the company’s assets, and it is generally more suitable for medium to larger businesses. 

How to: setting up as a sole trader – step by step

Clarify your business idea

The clearer and more specific you describe your activity, the easier the registration and customer communication will be. Instead of a general term like "consulting," specify your sector, e.g. "marketing consulting for small businesses." This helps the trade office categorise your business and clearly signals to customers what you offer.

Create a business plan

A well-structured business plan helps you think through and plan your business idea. It is often required by banks or investors. Focus on key sections: business idea, market analysis, marketing strategy, financial planning, and objectives. Numerous free templates and examples are available to simplify the process.

Choose your business name

As a sole trader, you can either use your personal name or a trading name. Important points:

• For non-registered sole traders (e.g. small businesses), your full first and last name must be part of the official business name to ensure clear identification (e.g. "Painter Master Anna Müller").
• Trading names are permitted as a supplement to your personal name, for example, "Anna Müller – Creative design" or "Müller Electrical Services".
• For advertising purposes, you may freely use a creative name, but your full name must appear on official documents like invoices.
• If you are a registered merchant (sole trader entered in the commercial register), you may use a trading name as the company name but must add the suffix "e.K.," "e.Kfr.," or "e.Kfm." (e.g. "Müller Electrical Services e.K.").
• Avoid misleading names that suggest incorrect company types or sizes. Purely fictitious names without name suffixes are not permitted without registration in the commercial register.

Register your business

Before starting, you must register your business with the appropriate trade office. Registration can usually be done in person or online. Fees typically range between €20 and €60. Check if your industry requires any special permits and arrange them in advance.

Tax registration and the ELSTER process

Shortly after registration, you will receive a tax registration questionnaire or you can submit it online via the ELSTER portal. Returning this form allows the tax office to issue your tax number, which you will need for invoicing and tax matters. If you do not have an ELSTER account, register early online, as verification can take several days.

Check commercial register entry requirements

Not all sole traders need to be entered into the commercial register. Registration is compulsory only if you are running a commercial enterprise or exceed certain revenue thresholds. Most small sole traders are exempt, reducing administrative effort.

Open a business bank account

For better financial overview, consider opening a separate business account, though this is not legally mandatory. A business account facilitates bookkeeping by clearly separating personal and business finances. When choosing, consider security, fees, online banking features, and integration with accounting software.

Organise your bookkeeping

To keep track of income and expenses and prepare tax returns, use digital bookkeeping tools. Popular options like sevDesk, lexoffice, or Accountable are user-friendly, automate recurring tasks and simplify data submission to tax authorities.

Setup costs

As a sole trader, you’re personally liable – meaning that your business debts aren’t legally separate from your personal assets. This structure gives you freedom, but it also means you take on all the risk. Think about whether this suits your goals and circumstances.

Registration fees

The registration fee for establishing a business ranges from approximately €20 to €65, depending on the municipality. This is the official fee for registering the business locally.

Commercial register entry

Should a commercial register entry be required, costs generally fall between €150 and €300. This step is compulsory solely for proprietorships structured with commercial management.

Tax and accounting 

Engaging a tax adviser typically involves annual charges from around €100 to €500. Digital bookkeeping solutions (such as sevDesk or lexoffice) can be expected to cost roughly €10 to €30 per month.

Business account

Opening a dedicated business account is recommended but not legally mandatory. Account management charges may range from nil to €50 per month, depending on the bank or provider.

Minimum capital

There is no statutory minimum capital required for setting up a sole proprietorship in Germany.

Liquidity planning and securities

Prudent liquidity planning is vital to avoid cash flow shortages. Having appropriate securities in place helps minimise potential business risks.

Liability explained

As a sole proprietor in Germany, full personal liability applies – meaning all personal assets, including one’s home, savings, and possessions, may be used to settle business debts. Creditors are not restricted to business assets; they may pursue private wealth if necessary.

Statutory exemption limits safeguard a portion of income and assets from enforcement, ensuring a basic minimum level for subsistence. The precise figure depends on individual circumstances, such as family obligations and dependents.

To restrict personal liability, it is possible to convert the sole proprietorship into a limited liability company—such as a UG (entrepreneurial company) or GmbH (private limited company). In these cases, liability is generally limited to company assets. However, banks may still require personal guarantees for business loans, so residual risk can remain.

Insurance cover, such as business and professional liability insurance, is strongly advised to protect against operational risks.

Summary

• Unlimited personal liability for business debts, using private assets if business funds are insufficient.
• Statutory safeguards ensure a protected minimum for living expenses.
• Limiting liability requires conversion to a limited company.
• Insurance policies should be in place to manage business risks.

Taxes and accounting

Depending on the size and turnover of your sole proprietorship, different bookkeeping requirements apply.

Income-expenditure accounting (EÜR): Most small sole proprietors and freelancers can use a simplified accounting method known as income-expenditure accounting. This involves recording only income and expenses, reducing administrative effort.

Double-entry bookkeeping: Once your business reaches a certain size or if you are registered in the commercial register, you are required to keep full double-entry bookkeeping, which means preparing a comprehensive balance sheet.

Tax obligations for sole proprietors

Income tax: You must pay income tax on your business profits, calculated according to your personal tax rate.

Trade tax: If you engage in commercial activities and your annual turnover exceeds €24,500, you are also liable to pay trade tax.

Value added tax (VAT): By default, you will need to charge VAT unless you opt for the small business regulation.

Payroll tax: If you employ staff, you are responsible for withholding and paying payroll tax.

Small business regulation: conditions and benefits

If your turnover was under €22,000 in the previous calendar year and is expected not to exceed €50,000 this year, you may qualify for the small business regulation. This means you do not have to charge or remit VAT on your invoices, which significantly simplifies your tax filings. However, the downside is that you cannot reclaim input VAT on business purchases.

Useful tips for getting underway

• Register your business promptly – ideally, shortly after you begin trading
• Keep all receipts carefully and digitise them wherever possible
• Assess which insurance policies are necessary or mandatory for you (e.g., health insurance, professional liability insurance)

Conclusion: your journey into self-employment starts here

Starting as a sole trader is one of the easiest, most flexible ways to turn your skills into a business. You’re in control from day one, with few upfront costs and minimal paperwork.

Just keep in mind: you’re responsible for managing risk, handling your own taxes, and staying compliant. Good recordkeeping and smart planning will serve you well – and if your business outgrows this structure, you can always switch.

Take the leap on your own terms – and grow your venture at your own pace.