Basically – entrepreneur or freelancer?
This decision is not always easy – however, the Income Tax Act (EStG) can help you a little. It regulates when someone is considered a freelancer or trader. If you don’t feel like rummaging through the paragraphs, take a quick look at the overview below.
Paragraph 18 of the EStG regulates who is a freelancer. This includes all scientific, artistic, literary, teaching and educational activities. There are also doctors, notaries and numerous others. Freelancers practice so-called catalog jobs and enjoy a number of advantages. A full-time journalist, for example, can use a third of his income as a flat-rate business expense. This is also possible if he actually had fewer expenses (keyword lump sum). Freelancers are self-employed and are subject to tax and legal form regulations that also apply to traders and other forms of business.
In general terms, every entrepreneur who is not a freelancer is a trader. Section 15 of the Income Tax Act tells us a little more about this. This includes, for example, the income of dealers, farmers and the profit shares of the personally liable partners of a KG. Nothing will change in terms of taxation. However, traders cannot set a flat rate for their business expenses . So you have to keep detailed records and can only deduct the actual expenses.
The small business owner
As a small business owner, you are an entrepreneur who does not, however, have a “commercial business”. Therefore, many of the provisions of the Commercial Code are not applicable to you, which gives you some advantages. For example, you have no obligation to keep books – unlike in the “normal” business. The tax code (AO) may, however, result in accounting obligations under tax law. Overall, however, you save a lot of administrative effort.
What is a small business owner?
Whether you are a trader or a freelancer – they all have one thing in common: entrepreneurship, which is defined by the Value Added Tax Act. It assumes self-employment with the intention of generating income. As a small business owner, however, you have a decisive advantage: You do not have to submit advance VAT returns and accordingly also do not have to report any sales tax. However, you cannot deduct input tax on business purchases, so careful consideration is required here. You are a small business owner if your turnover in the current year is not more than 17,500 euros and not more than 50,000 euros in the following year. The latter is to be forecast by you and reported to the tax office.
Corporation or partnership?
In the companies from which the sole proprietorship is excluded, for example, a distinction is made between corporations and partnerships.
A corporation is a corporation under private law and a legal person. A legal person is a bearer of rights and obligations with the exception of people. These are to be classified as natural persons. In Germany the AG, the KG and the GmbH belong to the corporations. They are characterized by a number of principles:
- There are fixed starting capital and legal regulations for capital maintenance. A certain share capital must always be available and must not be touched.
- The foundation takes place in several steps, e.g. articles of association, notarial certification of the articles of association and HR entry (commercial register)
- Will formation according to the majority principle, there is no final “boss”
- No personal liability of the partners, they are usually only liable with their contribution.
The legal form of the GmbH
According to photionary, the GmbH law and the HGB form the legal basis for the GmbH. The limited liability company was the first of its kind in the world and is founded in Germany by one or more people. It is the most widespread form of society. When the company is founded, a articles of association must be drawn up and notarized. This must contain at least the registered office, name and object of the company as well as the amount of the share capital and its distribution. The GmbH is fully legally competent as soon as you have had the entry in the commercial register carried out. A GmbH has the following advantages:
- She is limited in liability. This means that you are only liable for the part of your assets that you have invested in the company.
- The GmbH is an all-rounder and suitable for almost every branch of industry.
- Tax benefits from applying corporate tax instead of personal income tax
- Easily dispose of by selling shares
- Partners do not have to be natural but can also be legal persons
The disadvantages are, among other things, the high start-up capital of 25,000 euros including the corresponding liability and the time-consuming formalities involved in setting up the company. In addition, there are strict legal regulations regarding bookkeeping and accounting. For example, you are required to disclose your business figures at the end of the year. You also have to pay trade tax with a GmbH.
The legal form of the AG: For large projects
The stock corporation can be founded by you alone or with any number of co-shareholders. Shareholders are the co-owners of the company. A start-up capital is also required to found an AG, which is 50,000 euros. It is broken down into shares and issued to the individual co-owners, who invest the corresponding value of the share as capital in the company. To set up an AG, the procedure is similar to that of a GmbH, but there are still a few additional steps. The establishment must be checked and approved by an expert – e.g. tax advisor. You are also obliged to register the AG in the commercial register and to establish the individual bodies. These are:
- Supervisory board
- General meeting.
The board of directors runs the AG and is normally made up of several people.
The supervisory board elects the management board and monitors its activities, especially business decisions.
The general meeting consists largely of the shareholders, i.e. the co-owners of the company. You have, among other things, the right to information and profit sharing.
The advantages of the joint stock company:
- Slight increase in equity through the sale of shares.
- You can also found a company on your own
- Limitation of Liability to Company Assets
- High reputation.
However, there are also some disadvantages that are particularly important when setting up a business alone:
- Time-consuming, lengthy and expensive founding procedure
- High start-up capital
- Three organs and a correspondingly limited scope for individual decision-making
- The board of directors and the supervisory board are partially liable for private purposes
- Certain regulations on size, for example the supervisory board must consist of at least three natural persons. This also applies to the one-person AG.