Small business, small business owner regulation – what is the difference?

What is a small business – Kleinunternehmen?

A small business – Kleinunternehmen in German – is not a separate legal form or defined type of business. The term is often used colloquially. It is associated with a self-employed individual who is both the owner and the workforce of their business. Other characteristics are low risk, lower management and administrative costs and a manageable turnover. This can all be true, but it doesn’t have to be.  The European Commission offers an official definition of small and medium-sized enterprises (SMEs). These thresholds are not necessarily “small”.

However, in the world of business, the following terms are more relevant:
  • small trading business – Kleingewerbe
  • small business owner regulation – Kleinunternehmerregelung

The two have nothing to do with each other thematically, but are often confused.

Will I run a small trading business – Kleingewerbe?

You have a Kleingewerbe if you register a trade and become self-employed as a sole proprietor and expect a profit of less than 80,000 euros and a turnover of less than 800,000 euros per year. You are therefore exempt from the provisions of the German Commercial Code – Handelsgesetzbuch HGB – and the obligation to be entered in the commercial register – Handelsregister – via a notary.

  • The German Civil Code – BGB Bürgerliches Gesetzbuch applies to you.
  • Single-entry bookkeeping with net income statements is sufficient to determine profits for the tax office.

An important aspect of Kleingewerbe is therefore the way in which profits are determined. If you exceed the above-mentioned profit or turnover threshold as a business trading sole proprietor, you must determine your profit using double-entry bookkeeping, which also includes the annual preparation of a balance sheet and a profit and loss account. This also involves an entry in the commercial register – Handelsregister – via a notary.

The term “small business” or Kleingewerbe says nothing about whether you show VAT on your invoices or make use of the small business owner regulation.

How do I apply for the small business owner regulation – Kleinunternehmerregelung?

Are you planning to become self-employed and have you clarified whether your planned self-employed activity is classified as a trade-like business or a liberal profession? When registering with the tax office you can opt for the small business owner regulation – Kleinunternehmerregelung. The small business regulation is a statutory simplification regulation for companies with low turnover. This means that VAT is not charged. You can make use of the small business owner regulation if your total turnover did not exceed 22,000 euros in the previous calendar year and is not expected to exceed 50,000 euros  in the current calendar year.

If you start your business activity during the course of the calendar year, the turnover limit of 22,000 euros applies for the application of the small business regulation. In this case, you must estimate the expected turnover for the start-up year as part of a forecast. To check whether the limit of 22,000 euros is likely to be met in the year of foundation and thus whether the small business regulation can be applied, the estimated total turnover must be extrapolated to the full calendar year.  Examples are provided by Gründerplattform, the Chamber of Commerce and Industry  or the Tax Office.

If you apply the small business owner regulation, you may not show VAT separately in your invoices. Instead include a note, such as “Gemäß § 19 Abs. 1 UStG wird keine Umsatzsteuer berechnet.“ Please note that to due to the fact that VAT is not charged, you cannot claim an input tax deduction for purchased services.

Good to know: If you use the small business owner regulation – Kleinunternehmerregelung, you can also obtain and use a VAT ID without losing your small business owner status.

Further English language information and examples are available on the website of this tax office. Turn to the Munich tax office for general tax information. Check our page on Taxes and Accounting on how to locate tax professionals to advice you.