Business Legalities

This page is all about the first most general things to consider when contemplating to open a business and become self-employed after being employed. We will be introducing the difference between "trades" and "professionals (= professional service providers = freelancers". Not considering this difference can become costly.

I want to start a business in Germany and while doing so; I want to live here, too. How can that be accomplished?

Since 2005, Germany has an explicit regulation on the working migration of self-employed persons to Germany. The big "wow" about this is that you now have rules and not only discretion. In 2012, the requirements were further reduced. This will not be discussed here as this topic has been introduced to you in the section Entry > Reason of Residence: Business
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What is it like to run a business? I have only been employed so far and was laid off just recently.

Let me take a deeeeeep breath. The Germans have a nice saying to answer your question. It is derived from the word “selbständig” itself. This word means independent, self-employed, autonomous. The Germans like to say “Selbständig sein bedeutet sich selbst und ständig treten.” or Self-employment means to constantly kick oneself and that permanently. In fact, there is nobody else to do it, because you do not have a boss anymore telling you to do this or to do that.
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What do I need to start a business?

You only need three things: Money, more money and even more money. As you know, “Money makes the world go around…” Okay, now honestly: an idea, money, and endurance. Starting from the conceptual perspective, there are two possibilities: you either have an idea or you buy an idea. Latter is called franchise. Coming from the financial side, there are two ways to start: either you have assets or you buy assets – commonly referred to as a loan. Having your own fortune is the easiest way, but I do not think you would be reading this website if you were that rich. Receiving a loan is not the toughest way. Toughest is to obtain a bank loan. No kidding!
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I want to start a business. Will I need any special – foreigner related – permits besides work and residence permit?

No. Needing any special permits depends very much upon the business you will be running. As a foreigner, you will not encounter any special restriction concerning foreigners founding a business. Certain professions require special permissions and so the company to provide these services, but they apply for Germans just as well. Keep reading. In other words, German constitutional law forbids legal rules that say “Indians may not open restaurants.” If that Indian has been sentenced for a couple of years, he will not obtain a permission to open the restaurant due to his imprisonment only.
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Who is providing professional services?

In Germany, you have to keep in mind that every entrepreneur follows a business. Furthermore, German law distinguishes between “normal businesses”, so called “Gewerbe”, and professionals so called “freie Berufe”. The general differentiation between a normal business and professional services can roughly be compared to the difference of a “blue collar” and “white collar” job. The law in §18 I 2 EStG describes professional services as such:

Professionals are the self-employed activities of:

  • scientific, artistic, literary, instructing or educational activity, the independent occupation, engineers,
  • physicians, dentists, veterinarians, lawyers, notaries, patent attorneys, surveyors, sworn auditors,
  • architects, trade chemists, accountants, tax consultants (Steuerberater), consulting economists and management experts, sworn-in auditors (vereidigte Buchprüfer),
  • physiotherapists, journalists,
  • picture reporters, interpreters, translators, pilots,
  • and "similar professions".
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Some wording hints: "I render professional services." translates "Ich bin ein Freiberufler. [for men]" "Ich bin eine Freiberuflerin." [for women] or "Ich übe einen freien Beruf aus."

"I'm a tradesman." translates "Ich bin ein Gewerbetreibender. [for men]" "Ich bin eine Gewerbetreibende. [for women]" or "Ich übe ein Gewerbe aus."

Be aware, not everybody determines so strictly. The main relevance for the difference is in taxation.

 

To qualify as a professional do I have to do all the work all by myself? May I not hire personnel?

Having professionally trained personnel does hinder the qualification of as self-employed activity as long as it is preformed with expert knowledge and at own responsibly. In other words, an artist may hire a secretary to take care of his fan mailings. This artist, however, will come into trouble if his secretary becomes too creative…
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Anything else to consider?

You also have to be aware that there are “chambered” and “non-chambered” professionals. “Chambered” are such professions as attorneys, physicians, architects, and pharmacists. Not chambered professionals are e.g. translators, artists (singing, painting, drawing, etc.), journalists. The chamber is a administrative office ruling on the professional's license to practice. Practically seen, there are only two legal differences between a business and professional:

  • first in tax law,
    and
  • second in formal business (better business registration) law.

To make the right choice between both will be very cost effective in the future.
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How are freelancers treated in tax law?

Generally, the normal rules apply to professionals as well as other companies. Only, if you are self-employed natural person providing professional services, you will not be subject to business tax (Gewerbesteuer). This is the typical exception to this rule.
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I learned that I have to register my profession. Where am I to do it?

As a professional, you do not have to register at the trade office (Gewerbeamt). Every other business must register his or her business! Be aware that the Trade Office might not decline the registration of a professional because this promises the municipality more revenues… If you have mistakenly registered contact your attorney to help you deregister as a trade.
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Overview of the Differences between freelancers and trades

 
Professional
Trade
Compulsory membership at IHK
+
Registration at Gewerbeamt (trade office)
+
Permission from competent authority
- / +1
- / +1
Subject to trade tax
+
Subject to income / corporate tax
+
+
Subject to VAT
- / +2
- / +2
“- / +” implies that
1: the matter depends on the concrete business and no general information is possible,
2: both can be true but the decision needs professional consultation