The Right Legal Form ... Start Your Own Business Step 6
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| Photo by Scott Graham on Unsplash |
But this is not so easy at all, as there are different variants, some of which are subject to your own decision or are tied to certain conditions.
First, I look into the question of whether you are a trader or a freelancer. Then I introduce different legal forms and explain the advantages and disadvantages of these. There are also practical tips for the correct legal form.
The Right Legal Form
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| The Right Legal Form ... Start Your Own Business Step 6 |
I often write here on the blog that there is no such thing as “the one right decision” or “the one right way”, and you also have room for maneuver when choosing your legal form.
However, your prerequisites, requirements, and plans often automatically result in a certain legal form. If you give the tax office the wrong one, for example, it can be expensive later.
Therefore, you should read this article carefully and then make the “right” decision for your situation.
The following statements are of course my personal opinion and experience. If you have any questions about details, please contact the tax office or the trade office in your locality.
Freelancer or Trader?
Again and again, I hear and read that the self-employed prefer to be a freelancer. That would have so many advantages and one would also have to pay less to Father State.
So what is the difference between freelancers and traders?
Unfortunately, the answer is not that simple. To be considered a freelancer, you have to meet the following requirements:
- Freelancers naturally perform their work and are responsible for the work themselves.
- You have to be creative or work in a scientific, artistic, or literary field.
- An important characteristic for freelancers is a special academic qualification.
Since these criteria are somewhat vague, there are several defined liberal professions by law. These include doctors, lawyers, notaries, architects, tax consultants, journalists, and a few more. So in these professions, it is clear.
Often, however, web designers and other self-employed people also want to be considered freelancers on the Internet. And under certain conditions and with the right qualifications, this is possible.
But you should remember that as a freelancer you are not allowed to do some things that the commercial self-employed person is allowed to do:
- Freelancers are only defined by their performance. For example, they are not allowed to sell their products.
- In my opinion, it becomes critical with your website, on which you sell advertising and include affiliate links. In my opinion, you need a trade for that.
- In addition, certain liberal professions have restrictions on advertising or complete advertising bans.
- You can only hire employees if you run a business. As a freelancer, however, according to the law, you can make use of professionally trained workers. But the focus must be on the freelancer.
The freelancer has a few advantages:
- As a freelancer, you don't have to pay any trade tax.
- You are not a compulsory member of the IHK or the Chamber of Craftsmen and do not have to pay membership fees.
- There is no obligation to double-entry bookkeeping, but you can make an income-surplus account regardless of the amount of income.
- As freelancers, freelancers are allowed to provide their intellectual and non-material services for others.
It is clear for the legally defined liberal professions. Not with many others. As a web designer, it often depends on how the respective clerk at the tax office decides. Some judgments give pure web designers the status of freelancers.
However, I found the restrictions too strong for me personally. I wanted to build up a business and that includes, in addition to the design work (which I did for customers many years ago), programming my own CMS, working as an affiliate, setting up my internet projects, selling eBooks, etc.
That is why I decided to work in the trade, even if I naturally understand others who want to carry out purely freelance activities and accordingly (want) to be considered freelancers.
One shouldn't look at it too casually either. The tax office can revoke the freelance status retrospectively for up to 7 years, which should lead to heavy back payments. As a freelancer, selling a few self-designed T-shirts online can lead to your status being withdrawn.
In case of doubt, you should ask the tax office for a written statement regarding your status. Then you have to show something tangible later, when the clerk changes, for example.
Choosing the Right Legal Form
We come to the possible legal forms. When starting a business, you have to choose one.
First and foremost, of course, the question arises what the differences between the individual legal forms are, what advantages and disadvantages they have and what criteria may ensure that you have to choose a certain legal form.
In the following, I present the possible legal forms and address the points just mentioned.
Sole Proprietorship
As sole proprietorships, a lot of self-employed people start their own business, because as a lone worker you have the greatest freedom of choice and you usually get by with the income surplus calculation (EÜR) for the first time (with less than 60,000 euros in profit and 600,000 euros in sales). However, you have to give your name in business transactions (just a company name is not enough).
If the total turnover in the previous calendar year is less than 22,000 euros and in the current calendar year is 50,000, you can take advantage of the small business regulation. Then you do not need to show sales tax, but you are also not allowed to draw any input tax.
Liability: as a sole trader, you are liable for your private assets.
Bookkeeping: EÜR, if under certain limits.
Commercial register: not mandatory
Merchant
As a rule, one is considered to be a self-sponsored businessman if, according to the law, one needs “ a commercially organized business operation in terms of type or scope ”. Shops, restaurants, etc. fall into this.
Business partners often consider you more trustworthy if you are a registered trader. Especially since you can have a single company name.
Liability: as a businessman, you are liable for your private assets.
Bookkeeping: double bookkeeping.
Commercial register: yes
Freelancer
As a freelancer, if you are recognized, you will be treated similarly to a sole proprietorship.
Liability: as a freelancer, you are personally liable for your private assets.
Bookkeeping: EÜR (voluntary double bookkeeping)
Commercial register: no
GbR
The GbR (civil law partnership) is an option for both commercial self-employed people and freelancers if you want to set up a business with a business partner.
In the case of freelancers, neither should have any commercial income, as this also rubs off on the status of the partner.
Liability: you are also liable for your partner with your private assets.
Bookkeeping: EÜR
Commercial register: no
PartG
The PartG (partner company) was created for freelancers. However, it is rarely used.
Liability: in principle, the partners are liable for their private assets. But if the only one makes mistakes, the other is not liable for him.
Bookkeeping: Income-surplus-account
Commercial register: Entry in the partnership register
OHG
The OHG (general partnership) is more or less the partner company for merchants. More tips when founding a joint venture with others.
Liability: the partners are liable for their private assets.
Bookkeeping: double bookkeeping.
Commercial register: yes
Basement
The UG (entrepreneurial company, also called mini GmbH) is quite popular. The advantage here is that there is a limitation of liability and one euro is sufficient as share capital. This is an alternative for individuals self-employed. However, you always have to point this out with the addition “UG (limited liability)” and this could deter potential business partners.
Liability: only the company's assets are liable.
Bookkeeping: double bookkeeping.
Commercial register: yes
UG & Co. KG
This special form combines the advantages of the UG and the limited partnership. However, the personally liable partner here is the UG. So it is a partnership with limited liability to the assets of the UG.
Liability: only the corporate assets of the UG are liable.
Bookkeeping: double bookkeeping
Commercial register: yes
GmbH
The GmbH, which can be founded by both commercial self-employed and freelancers, is well known. The establishment is quite expensive (partnership agreement, entry in the commercial register) and at least 25,000 euros of the share capital must be invested.
Liability: only the company's assets are liable.
Bookkeeping: double bookkeeping.
Commercial register: yes
Limited
The Limited was very popular in the past, as it can be set up very quickly and you are not liable for your private assets. However, the follow-up costs can be quite high because there are, for example, separate regulations such as the “secretary”. In addition, an annual financial statement must be submitted later to the English register. In addition, some banks in Germany do not give a limited company a business account. With the introduction of the UG, the Limited is no longer so attractive.
Liability: Limitation of the limit of liability.
Bookkeeping: double bookkeeping.
Commercial register: not mandatory
That should have been it with the overview of the legal forms. There is more information in the linked articles.
As you can see, the differences lie in the details and you should think carefully about what makes sense not only at the start but also later. However, it is possible to change the legal form later. It is then only associated with a certain amount of effort and costs.
The BMWi's start-up portal offers interactive e-training for this.
I, The Sole Proprietor
I founded my own business more than 15 years ago and still am today. Since I work alone, but just wanted to build a real business, freelance status was out of the question.
In the past few years, I have thought about hiring employees or wanted to offer new services, which is why I thought about changing the company structure. But I remained a sole trader. To cover liability risks, I have media liability * insurance.
So It Goes on
The next part of the series of articles is about choosing a company name. What makes sense and what are the legal requirements?
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