A sole proprietorship (Einzelunternehmen) is the simplest business form under German law: a single natural person sets up and runs the business alone, with no minimum capital and no notarized formation. In exchange, the owner is personally liable, without limit, with their entire private assets for all of the business's obligations.
What is a sole proprietorship (Einzelunternehmen)?
The Einzelunternehmen is not a separate legal entity in the way a GmbH or an AG is. It is the term for a commercial or professional activity carried out by a single person, in their own name and for their own account. There is no separation between private and business assets, and the business itself has no legal personality: owner and business are legally identical. Depending on the scale of the operation, German law distinguishes between the registered sole trader (Einzelkaufmann / e.K., entered in the commercial register and subject to the merchant duties of the Commercial Code, HGB) and the unregistered small business (Kleingewerbe).
In business succession, the sole proprietorship is the legal form with the biggest peculiarities when it comes to a sale: because the business and its owner form a single legal entity, a classic share deal (sale of shares) is not possible. A sole proprietorship can only be sold via an asset deal, in which individual assets, contracts, and, where applicable, employees are transferred.
How do you set up a sole proprietorship?
Setting up a sole proprietorship requires no minimum capital and, as a rule, no notary. For a commercial activity, registering with the local trade office (Gewerbeanmeldung) is sufficient; for a liberal-profession activity (e.g. doctors, lawyers, many consultants), even that is not required - registering with the tax office is enough. Once the business is "commercially organized" in scale and nature, registration in the commercial register as a sole trader (Einzelkaufmann, e.K.) becomes mandatory; smaller businesses can register voluntarily. Registration brings additional obligations under the Commercial Code (including double-entry bookkeeping and a company name carrying the legal-form suffix "e.K.").
How does liability work for a sole proprietorship?
Liability is unlimited: the owner is liable with their entire business and private assets for all of the business's obligations, with no cap. This is a fundamental difference from capital companies such as a GmbH or a UG (haftungsbeschränkt), where liability is limited to the company's assets. This full entrepreneurial risk is the central drawback of the legal form, and one of the main reasons growing sole proprietorships are often converted into a GmbH or UG.
Sole proprietorship vs. GmbH vs. UG: what's the difference?
Criterion | Sole proprietorship (Einzelunternehmen) | UG (haftungsbeschränkt) | GmbH |
|---|---|---|---|
Minimum capital | none | from €1 | €25,000 |
Liability | unlimited, with private assets | limited to company assets | limited to company assets |
Formation effort | low, usually no notary | notarization required | notarization required |
Number of founders | one person | from one person | from one person |
Sale in a succession context | asset deal only | share deal or asset deal possible | share deal or asset deal possible |
Bookkeeping | simplified (income/expense statement) up to certain thresholds, otherwise double-entry bookkeeping as e.K. | double-entry bookkeeping (mandatory) | double-entry bookkeeping (mandatory) |
What are the advantages and disadvantages of a sole proprietorship?
The main advantage is a simple, low-cost, fast formation with no minimum capital and usually no notary, ideal for an uncomplicated start into self-employment. As long as turnover and profit stay below certain thresholds, a simplified income/expense statement (EÜR) is enough instead of full accrual accounting. The decisive disadvantage is unlimited personal liability: business risks directly affect private assets. On top of that comes limited saleability in a succession scenario, since only an asset deal is possible, and often a weaker external perception with banks and larger business partners compared to a capital company.
How does a sole proprietorship become a GmbH or UG?
A sole proprietorship cannot be converted into a GmbH or UG through a formal change of legal form under the German Transformation Act, since it has no legal personality of its own. Instead, the business is contributed to a newly formed GmbH or UG through a spin-off or individual transfer of assets (contribution in kind) – assets, contracts, and, where applicable, employees pass to the new company either individually or, for bookkeeping sole traders under certain conditions, via universal succession under the Transformation Act. This step is common for growing businesses seeking to limit liability and improve their succession or sale prospects.