Choosing a legal form in Germany: which business structure suits your start-up?

Which legal forms are there for founders? An overview

The legal form (Rechtsform) determines who is liable, which taxes apply, how much bookkeeping effort is involved and how you present yourself. For small start-ups in Germany, six forms are mainly relevant. The costs in the table are typical orders of magnitude for notary, register and trade office; they depend on the individual case and the business value.

Sole proprietorship and freelancers: the simple standard

If you start alone and agree nothing else, you are automatically a sole trader (Einzelunternehmer). Trade businesses register a trade at the trade office (Gewerbeamt), freelancers (§ 18 EStG) only register with the tax office via the tax registration questionnaire (Fragebogen zur steuerlichen Erfassung). You trade under your first and last name; an addition such as “Webdesign Müller” is allowed as long as it does not look like a company name in the commercial register.

Advantages: no set-up costs, no balance sheet as long as you stay below the limits of § 141 AO (€800,000 revenue or €80,000 profit a year; freelancers are exempt altogether), full freedom of decision, withdrawals at any time without tax consequences. The disadvantage is unlimited liability: a client’s damages claim can hit your private assets. Professional or business liability insurance often helps more against typical risks than a legal form does.

Sole traders running a trade business have a trade tax allowance of €24,500, and the trade tax paid is credited against income tax up to 4.0 times the base amount (§ 35 EStG). With municipal multipliers up to about 400 %, trade tax is therefore largely neutral in the end.

e.K.: the registered merchant

The registered merchant (eingetragener Kaufmann) is a sole proprietorship entered in the commercial register. Registration is mandatory if your trade business requires a commercially organised operation by its nature and scale (§ 1 HGB) – for example with many employees, high revenue or a warehouse. Any trade business can register voluntarily; freelancers cannot be an e.K.

Advantages: you may choose a company name freely (with the suffix “e.K.”) and appear more established. Disadvantages: commercial law applies (e.g. stricter duties to inspect goods and give notice of defects on purchases), and in principle you are required to keep books. Sole merchants with at most €800,000 revenue and €80,000 annual surplus on two consecutive balance sheet dates are exempt (§ 241a HGB) and may then continue to use the EÜR. Liability remains unlimited.

GbR and professional partnership: starting up together

If two or more people run a business together, a civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR) arises automatically – even without a written contract. A partnership agreement is still strongly recommended: it governs profit sharing, withdrawals, decisions and above all what happens when a partner leaves. Since the reform of partnership law (MoPeG, since 1 January 2024) a GbR can register in the partnership register (Gesellschaftsregister) and is then called “eGbR”; this is mandatory mainly if it wants to acquire real estate.

For tax purposes, the GbR itself is the taxpayer for VAT and, if applicable, trade tax and receives its own tax number (Steuernummer). The partners pay income tax: the profit is determined with a return for separate and uniform determination (gesonderte und einheitliche Feststellung) and allocated to the partners. A trade GbR has the €24,500 allowance. Caution: even a small trade activity makes a freelancers’ GbR a trade business as a whole (Abfärbewirkung, “contagion effect”), but there is a de minimis limit of 3 % of revenue and at most €24,500 a year.

The professional partnership (Partnerschaftsgesellschaft, PartG) is only open to freelancers, for example consultants, engineers, architects or translators. For errors in professional practice, only the partner who handled the job is liable alongside the partnership (§ 8 Abs. 2 PartGG). In the PartG mbB this liability is even limited to the partnership’s assets if a legally required professional liability insurance is in place – this only exists for professions whose professional law provides for such insurance.

UG (haftungsbeschränkt) and GmbH: limiting liability

UG and GmbH are corporations (Kapitalgesellschaften): they are separate legal entities and are liable with their company assets, not with your private ones. They are founded at a notary – either with individual articles of association or more cheaply with the statutory model protocol (Musterprotokoll, up to three shareholders, one managing director). Since August 2022 formation is also possible online via video procedure.

The GmbH needs €25,000 share capital, of which at least €12,500 must be paid in before registration for a cash formation. The UG is a GmbH with less capital (from €1); in return it must put a quarter of its annual surplus into a reserve every year until €25,000 is reached. After that it can be renamed a GmbH. A UG with €1 capital is over-indebted with its first invoice – realistically plan at least a few thousand euros.

The limitation of liability has limits: banks and landlords often demand a personal guarantee, and managing directors are personally liable for breaches of duty, for example where unpaid social security contributions or a late insolvency filing are involved. Your salary as managing director is employment income with wage tax; whether you are subject to social insurance depends on your shareholding (with at least 50 % or a blocking minority usually not) – details in the guide bogus self-employment and status determination.

EÜR or balance sheet? Bookkeeping by legal form

Profit determination is the biggest everyday difference. With the cash-basis profit statement (EÜR) what counts is when money moves; balance-sheet preparers work with double-entry bookkeeping, receivables, liabilities, provisions and stocktaking and must partly publish their annual accounts. For the balance sheet and annual accounts of a GmbH most people work with a tax advisor – expect noticeable ongoing costs.

Taxes compared: worked example sole proprietorship vs. GmbH

Sole traders pay income tax on the progressive scale (up to 42 %, 45 % from €277,826 taxable income). Corporations pay 15 % corporation tax (Körperschaftsteuer) plus 5.5 % solidarity surcharge on it, and trade tax – without an allowance, even for freelance activity. With a municipal multiplier of 400 %, this totals around 29.8 %. If the GmbH distributes profits, the shareholder additionally pays 25 % flat-rate withholding tax (Abgeltungsteuer) plus Soli.

Example 2026: profit €80,000, trade business, municipal multiplier 400 %, single, no church tax, simplified without special expenses and without a managing director’s salary. For the sole proprietorship, the trade tax of €7,770 is fully credited against income tax.

When is it worth changing your legal form?

The example shows: a GmbH only saves tax if you leave a large part of the profit in the company and reinvest it – and even then the advantage must cover the costs of balance sheet, notary and tax advice. For sole traders there is also a separate option for retained profits, the retention relief (Thesaurierungsbegünstigung, § 34a EStG), but it requires a balance sheet. Typical triggers for a change are:

• High liability risks that cannot be insured (e.g. product liability, large projects with contractual penalties).
• A partner or investor joins – with a second partner, the sole proprietorship automatically becomes a GbR unless you set up something else.
• Profits well above €100,000 a year, a large part of which you do not need to live on.
• Client requirements: some large clients prefer to hire a GmbH, partly because of the risk of bogus self-employment (Scheinselbstständigkeit) with individuals.
• An existing sole proprietorship can be contributed to a GmbH (§ 20 UmwStG); this can be done tax-neutrally but should be planned with a tax advisor.

Legal form and Kontelio

Kontelio is built for the self-employed who determine their profit with the EÜR – above all sole traders and freelancers, including those with several activities. You write legally compliant invoices and e-invoices, record expenses and receipts, get the EÜR, VAT return, annual VAT return and trade tax return, and send them directly to ELSTER (Business/Pro). For a UG or GmbH with a balance sheet obligation, payroll for the managing director or the determination return of a GbR, Kontelio is not the right tool. More about bookkeeping software for the self-employed.

Frequently asked questions