Working Life > Self-Employment > Small-Scale Business

Small Scale Business: Types, Tax Regulation

Definition, Explanation

A runner of a small-scale business, in Germany, is someone whose annual turnover is below a certain limit. § 19 UStG, turnover tax law, prescribes: An entrepreneur who achieved a turnover up to 17,500 Euros €, in the previous year, and in the current year is going to achieve a turnover below 50,000, can be a small-scale entrepreneur. Being a small-scale entrepreneur results in the following easing advantages:

• You do not have to register in trade register
• You do not pay turnover tax
• You do not specify turnover tax on your bills
• You can calculate your profit for income tax declaration simply as the surplus of revenue

Furthermore, the following applies to small-scale businesses

• They will not be paid back turnover tax that they pay to other businesses (e.g. when purchasing commodities)
• Small-scale businessmen name their business their first- and surname, not a made-up name
• They are not subject to the rigid regulations of German Commercial Code (HGB). Instead, they are subject to the (protective) regulations of German Civil Code (BGB)

However, a small-scale businessman can, uncompulsorily, upon application, be registered in the trade register. The business, then, is a “commerce”, while the businessman is a “registered trader” as in § 1 HGB. Once registered, he will not be un-registered for 5 years, though. Disadvantages of being registered:

• Determination of taxable income for income tax declarations has to be done by (tradesmen’s) double-entry bookkeeping

Advantages can be:

• A trade-registered business with a register number seems more reputable and “bigger” to potential business partners
• The company name can be a made-up, fancy name. Thereby, your personal name can remain concealed, e.g. in advertisements
• Deals are covered by the more rigid regulations of Commercial Code HGB

Tips, Checklist

• Consult a tax adviser whether being rated a small-scale business makes sense in your case
• Most online-traders, in Germany, have small-scale status
• Generally, small-scale regulations are advantageous if
  • low costs arise with the starting of the business and
  • the selling is done mainly to private customers or other small-scale businesses
  Because if the starting of an independent business costs much, e.g. office furniture, computers, cars, tools, then the small-scale business still has to pay the turnover tax when buying these things, without being refunded it as a “pretax” by the revenue (in contrast to a registered trader). Since these things remain within the company, this tax disadvantage cannot even be passed on to customers
• The small-scale business option is also disadvantageous if customers are mainly other regular businesses: Those possibly try to get bills that entitle them to pretax-refunds which a small-scale business, as a seller, will not yield
• Check whether at all you can take the small-scale option:
  • For the year of founding, the annual turnover has to be estimated plausibly; it must not exceed 17,500 €
  • Also, the turnover of the following year must be estimated; it must not exceed 50,000 €
  • Only if BOTH requirements are met, you can invoke the small-scale business regulation IN THE YEAR OF THE FOUNDATION. Revenue can demand explanation for the estimation of turnovers
  • If the foundation occurs in the current year, the turnover is calculated pro-rata
• In the following years, the actual turnover is determined: if it exceeds 17,500 €, the small-scale business regulation will not apply any longer from the subsequent year on

Last update: 07/29/2010