How is a sole proprietorship taxed?
- Trade tax
A sole trader is – like all other business people – obliged to pay taxes. He has to pay trade tax if he is active within the meaning of the Trade Tax Act (GewStG). If he is a small business owner, he has to pay trade tax. This trade tax is partially offset against income tax. There is currently an annual allowance of 24,500 euros for trade tax. The sole trader only has to pay trade tax if the annual profit exceeds this amount. The tax assessment rate of the respective municipality in which the company is located applies to the determination of the exemption.
- Income tax
The sole proprietorship is also obliged to pay income tax . This income tax can affect income
- independent work
- Commercial enterprise
- Agriculture and Forestry
Respectively. It is not the company but the owner who is obliged to pay income tax. If a sole proprietorship earns income from business operations, the income tax is reduced by 3.8 times the amount of the business tax base.
- Sales tax
In addition, the sole trader may be obliged to pay sales tax , as he is an entrepreneur in accordance with the Sales Tax Act. To determine the sales tax, he must make the necessary records. If the total annual turnover of a sole proprietorship in the founding year is not higher than 17,500 euros, the entrepreneur can make use of the small business regulation , but then he cannot claim input tax.
Determination of profits in sole proprietorship
A sole trader is obliged to keep accounts properly if he is an actual businessman. Depending on the turnover or profit within a year, he has to do double or single bookkeeping. If the annual profit exceeds 60,000 euros or if the annual turnover is higher than 600,000 euros, he even has to draw up a balance sheet and is also obliged to keep double bookings . However, if his annual profit or annual turnover is below these limits, he is not obliged to double-entry bookkeeping, he only has to do so as part of his tax return submit an income-surplus-statement (profit and loss account, income statement). If he exceeds the limit for annual profit or annual sales once, the tax office will ask him to do double-entry bookkeeping and to draw up a balance sheet.
When does a sole proprietorship have to become a registered businessman?
Not every sole trader has to be registered in the commercial register. Registration is voluntary for small businesses. If an entrepreneur runs a trade as a sole trader – this can be an online shop or a retail store – he does not have to be registered, but he can. If he does not register, he does not lose his status as a merchant. Under various conditions, however, a sole proprietorship with a commercial trade must be registered in the commercial register.
This is the case when sales and profits exceed a certain amount in accordance with the tax code. A trader, for example a sole trader who runs a sheet metalworking shop, only becomes a merchant when he is entered in the commercial register. Entry in the commercial register is not a must, but it can be advantageous for sole proprietorships. If you want to be entered in the commercial register as a businessman, you have to contact a notary, as all information about legal validity must be certified. Information about
- Company and company name
- Company headquarters and, if applicable, branches and branches with address
- Purpose of the company
- Persons who are authorized to represent
- possibly amount of the share capital
are required for entry in the commercial register. The registration is subject to a fee, it costs around 200 to 300 euros for sole proprietorships. There are also the costs for the notary.
Advantages of being a sole proprietor
Being a sole trader has various advantages. You don’t have to coordinate decisions with a business partner, you have full decision-making power and can decide for yourself. The sole proprietorship has the power of disposal over all of his business assets. He does not need a minimum capital to set up his company. It is inexpensive to set up a sole proprietorship as a start-up. Costs may only be incurred for registering a business, obtaining permits, consulting a notary and entering in the commercial register. If you work as a freelancer, there are no costs for registering with the tax office. The profit generated belongs to the entrepreneur alone. It is at his discretion whether he shares the profits with his employees. When lending to banks or creditors, the sole trader has a good basis for negotiation, as he is solely liable. If the sole proprietorship is active as a trader, he can take advantage of tax advantages in the form of a high tax allowance.
Disadvantages of sole proprietorship
As attractive as the advantages of a sole proprietorship may appear at first glance, working as a sole proprietor also has disadvantages. A decisive disadvantage is the liability, since the sole proprietorship must be liable with all of his business and private assets.
Legal capacity of sole proprietorships
A sole trader has legal capacity in various ways, as he can acquire rights as a person. These can be property rights and rights in rem to land. He can enter into obligations, sue in court, but also be sued personally. This distinguishes it from a legal person, such as a KG .
Dissolution of sole proprietorship
According to wholevehicles.com, a sole proprietorship has the option to dissolve his company. The dissolution takes place when the owner transfers essential business assets to his private assets or sells them. In this way, he can cease business operations quickly and easily.