Small business

In Germany, small businesses are entrepreneurs whose turnover does not exceed a certain threshold, which means that the VAT Act exempts them from certain VAT obligations. According to § 19 UStG, they are exempt from VAT if they make use of the small business regulation. Although this regulation exempts them from VAT on their own sales, they are not entitled to deduct input tax.

Small business owners carry out entrepreneurial activities on their own responsibility, be it in the craft, trade or service sectors. These activities are carried out independently, regularly and with the aim of making a profit.

Small businesses can be exempt from VAT as long as their turnover in the previous year does not exceed a certain threshold (€22,000 in 2023) and is expected to be less than €50,000 in the current year. The structure of such companies can be natural persons or civil law partnerships (GbR), while other forms of company that operate a trade are considered merchants within the meaning of the HGB.

In contrast to larger companies, small businesses are not usually entered in the commercial register. This makes it easier to start a business and reduces the bureaucratic requirements for founders.

The advantages of a small business:

• Low-threshold start-up: a small business can be set up via a normal registration at any local trade office for just a few euros. It exists immediately and does not require a larger partnership agreement, it is not normally entered in the commercial register and you can start operating immediately.
• Low bureaucratic hurdles Only a profit and loss account is required for a small business, making it the simplest type of accounting. Resourceful founders can run it without any help from the tax authorities. There is no need for double-entry bookkeeping and a balance sheet. If you wish, you can be exempt from VAT. This also eliminates the need for advance VAT returns and invoices are written without VAT with reference to the small business regulation.
• For the quick implementation of smaller ideas or sideline activities A small business can be particularly worthwhile for small ideas that do not have the potential for a large scale-up or only serve a manageable target group. Many small business owners appreciate the security of their main job.
• Transitional opportunity to self-employment Many founders shy away from the risk of switching directly to full self-employment or setting up a legal entity. With a small business, you can take your first entrepreneurial steps within a manageable framework. The founder can mature and grow in line with his idea. Depending on his turnover, a notarized incorporation or a full trade will only be required when the business is ready.
• Price advantage by not collecting VAT As the tax office does not collect VAT, the small business owner has a price advantage over competitors who have to pay the tax. This varies depending on the amount of input tax deducted.
• Small businesses as freelancers Freelance activities can also benefit from the small business regulation if they are small in scale.

The disadvantages of a small business

• Personal and unlimited liability Small business owners have unlimited personal liability for their small business, unlike companies where liability is limited. As turnover is limited on the income side, the risk here is diametrically opposed to other types of company.
• Reduced reputation in business dealings Some full entrepreneurs do not regard a small business owner as a fully-fledged merchant and are therefore not prepared to do business with one. The mandatory wording on the invoice regarding the "small business regulation" in accordance with Section 19 UStG also reminds business partners of their status.
• No input tax deduction If the small business regulation is used, there is no right to deduct input tax. This means that no VAT can be refunded by the tax office for operating expenses. Especially at the beginning of an activity, there are often increased investments, which are correspondingly more expensive with the small business regulation.
• Increase in costs when the turnover limit is reached If you exceed the turnover limit, you must charge VAT on your invoices. Passing on the costs to customers can be problematic, especially if you are active in the B2C and not the B2B sector.
• Taxation based on income The profit of the small business is personally linked to the small business owner and is taxed on their income. This can lead to an increased tax burden compared to a conventional company.

When is the small business regulation worthwhile

The regulation can play to its strengths above all in areas in which only low investment and operating expenses are incurred. The non-existent input tax deduction is therefore less significant and has no impact on profits.

From personal experience, being a small business owner is particularly worthwhile for smaller services that are not subject to self-employment. Especially in the areas of hobbies or your own professional profession, business opportunities can always arise for which you certainly don't want to set up a fully-fledged company. Everything is done with one registration and you can write invoices with a clear conscience.

The really good thing is that you are not under any great pressure as a small business owner. You don't suddenly have to write a full balance sheet, but can get by with a simple profit and loss account. If your business idea develops positively, you can still consider which path you want to take as a founder. If the implementation does not meet with the desired response, the status can be continued without any further major costs.

A concrete example over several decades

I myself started repairing a few computers in the 2000s, reinstalling Windows here and there in the neighborhood, defragmenting hard drives, installing updates, etc. Ultimately, it was a little extra income to supplement my studies and, to be honest, nobody really wanted a bill. And yet there was always one, if only to be on the safe side legally. It only became more exciting when the first stores in the street asked if I could also create a website. Of course, the area continued to grow over the following years until the tax office, or rather my tax consultant, told me that it was time to set up a company after all.

The business was then outsourced to the company, but I kept the small business. Over the years, I still like to use it to test smaller projects, check out markets and prepare potential start-up ideas. I also like to run in the odd invoice for social media consulting for Family & Friends, which didn't even exist at the start of the small business.

Especially at the beginning of the entrepreneurial activity, I had great learning effects through the small business. Telecommunications, my own PC and tools suddenly became business expenses. At trade fairs and conferences, you could also submit tickets and even claim travel costs and accommodation. And it's precisely these little details that they don't teach you at school or at university. As my first contact with bureaucracy, being a small business owner has already paid off for me.

Over the decades, the effort involved in running a small business has always been limited. After a few years, I opened a business account for it at the local savings bank so that I don't always have to work out the business income and expenses from the private side. Otherwise, I collect receipts and invoices in a folder throughout the year and simply hand them over to my tax advisor. However, if I had to, I could still write the P+V, fill out the EÜR & Anlage N and submit them to the tax office myself. Ultimately, time is the scarce commodity today and it wouldn't make business sense.

Even though other companies have come and gone, I would like to make a positive plea for small businesses. No matter how things develop in terms of business, I will still keep my small business. Entrepreneurial freedom is too close to my heart for me to ever give it up completely.

Small business in a team or with partners

As this is a legal status, it is not intended for companies or partnerships. Of course, that doesn't mean we haven't already done it, and that really wasn't smart. The partners decided to operate an Internet portal and that would actually have been a GbR. In the end, however, we all muddled around with our small businesses and it's hard to imagine the excesses of the paperwork. Imagine a business in which every activity, no matter how small, as well as the income, results in several invoices. To give a concrete example, someone pays the costs for the server on which the Internet portal is located. He then divides this invoice by the number of partners and sends out a separate invoice for the proportionate amount. There are certainly cleaner methods with monthly invoices, etc., but the way is clear. In addition, there can always be disagreements within the team and resolving this without a partnership agreement is a mountain you certainly don't want to climb.

While there may have been one or two theoretical reasons in the 1990s, this has become obsolete with the introduction of the Unternehmergesellschaft (UG - haftungsbeschränkt) as a company form. Alternatively, there is still the GbR, which received an update in 2024 and with which you can or must now also be entered in the commercial register.

Insurance for small business owners

Even a small business owner can take out business liability insurance. Every resourceful insurance broker will have a suitable product in their portfolio. For basic knowledge on public liability insurance, we would like to refer you to the corresponding knowledge article on public liability insurance for start-ups. With the appropriate basic knowledge, you will be in a better position to make a decision. There are certainly enough fields of activity in which public liability insurance makes sense, but whether this also applies to a small business is a completely different matter. Basically, it can be said that this type of insurance is relatively expensive in a commercial environment. With a capped turnover of €22,000 per year, it is ultimately an entrepreneurial decision that everyone has to make on their own responsibility.

If you decide to take out such a policy, you will be quite surprised in most cases when you apply for insurance. The most impossible risks are clarified there, including those from the chemical industry, for example. In most cases, however, your own office chair is likely to emerge as the greatest source of danger.

If you don't want to compare insurance policies with a sharp pencil, you have the option of asking an existing private liability insurance company whether the scope of your small business can possibly be insured.

When small entrepreneurship is not suitable

In principle, it can be assumed that business areas with low margins are not suitable for a small business. If you take a trade with a 10% margin as an example, you could achieve a maximum profit of € 2200 in a normal financial year with the regulation and would already have reached your turnover of € 22,000.

Small business Differences to small trade

Small entrepreneurs and small businesses are two different concepts in Germany that are often confused but have different meanings.

1. Small business owner:
   • A small business owner refers to the VAT regulation according to § 19 UStG. This means that an entrepreneur whose turnover did not exceed EUR 22,000 in the previous calendar year and is not expected to exceed EUR 50,000 in the current year is exempt from VAT. This regulation exempts the small business owner from the obligation to invoice VAT and pay it to the tax office. However, a small business owner can voluntarily waive the application of this regulation.
2. Small business:
   • The term "small business" is not explicitly used in the law. However, it is often used informally to describe a small commercial enterprise that usually has a small number of employees, generates a low turnover and is often run by a single person. A small business can be run either as a sole proprietorship, a partnership (e.g. GbR) or a corporation (e.g. GmbH). In contrast to small business status, which relates to VAT, small business generally refers to the size and scope of a company. Small traders have an annual, tax-free profit of up to 24,500 euros, up to which they do not have to pay trade tax.

Overall, it can be said that the term "small business" refers specifically to the VAT regime, while "small business" is a general description for small commercial enterprises, regardless of their tax treatment.

Combination of small business and small enterprise in practice

In practice, the small business scheme is often combined with a small business. This combination is popular because many small businesses, which generally have a limited turnover and simple organizational structures, can benefit from the administrative advantages of the small business scheme. By making use of the small business regulation, they are exempt from the obligation to invoice and pay VAT, which simplifies bookkeeping and reduces the financial burden.

Important information for small businesses according to § 19 UStG

It is particularly important for small business owners to indicate separately in their invoices that no VAT is charged in accordance with Section 19 UStG.