To start a sole proprietorship in Germany, you can choose from different legal forms for different titles and roles: freelancer, small business owner, or registered merchant. In this article, we will explain the requirements for becoming a registered merchant, the registration process, and the pros and cons of this legal form. We will also cover the special aspects of taxes, liability, and accounting.

What’s in this article?

• What is a registered merchant?
  
• How do you register as a registered merchant?
  
• What are the pros and cons of the registered merchant legal form?
  
• What taxes do registered merchants have to pay?
  
• What accounting obligations do registered merchants have?
  
• What should registered merchants know about liability?
  

What is a registered merchant?

A registered merchant, known in German as “e.K.” for “eingetragener Kaufmann” or “eingetragene Kauffrau,” is a sole proprietor who runs a commercial business and is listed in the Commercial Register. Registered merchants must follow the rules set by the German Commercial Code (HGB). This sets them apart from small business owners, who are unregistered sole proprietors governed by private law under the German Civil Code (BGB).

Whether sole proprietors need to register as merchants in the Commercial Register depends on factors such as the nature of the business and the company’s size. There is a difference between a “de facto merchant” (“Ist-Kaufleute”) and an “optionally registrable merchant” (“Kann-Kaufleute”). In principle, the following applies: all merchants must register in the Commercial Register if their business activities require a commercial operation. However, it is not always easy to decide whether this applies to a particular merchant. An annual turnover exceeding €800,000 or an annual profit over €80,000 can be an indicator. Other factors can also be considered, such as the number of employees, the value of fixed and current assets, the types and range of services offered, or the volume of products.

If the business is a commercial operation, it is considered a de facto merchant. Therefore, it must be listed in the Commercial Register. If the business doesn’t need a commercial operation, it’s referred to as an optionally registrable merchant. These businesses can choose whether to be listed in the Commercial Register. If you’re unsure, the Chamber of Commerce and Industry can help to determine whether your business needs to be entered in the Commercial Register.

Registered merchants must also be sole owners, without any partners in the business. If several merchants form a company together, it becomes a general partnership (an “offene Handelsgesellschaft” or OHG).

The usual German abbreviation for registered merchants is “e.K.” Occasionally, the gendered abbreviations “e.Kfm.” or “e.Kfr.” may be used.

How do you register as a registered merchant?

Registering as a registered merchant in Germany involves a formal process with multiple steps:

• Business registration: Before registering as a registered merchant, you must first register with the appropriate trade office. This can be done in person or online. You apply for a trade licence and pay a manageable fee, generally up to €65.
  
• Entry in the Commercial Register: To be entered in the Commercial Register, your application must be notarised. You might want to start by finding a notary who can notarise and submit your application. The application must include your first and last name, date of birth, place of birth, and place of residence. Additionally, you’ll need to provide details about your company, including its legal form, name, registered office, and purpose. Aside from the notary fees, you should anticipate paying a fee (usually under €600) for the Commercial Register entry.
  
• Registration with the tax office: Registered merchants must inform their tax office within one month of registering the business that the business has started operating. Typically, the trade office will automatically forward the necessary information about the business. However, if you’re unsure, it’s best to confirm whether this has been done. Next, the tax office will send you a tax registration questionnaire that you need to fill out. You can hire a tax consultant to help with this. Most importantly, you need to provide a realistic estimate of your expected turnover, as the tax office will use this to calculate your income tax. As a registered merchant, if you want to use the small-scale entrepreneur rule, you must tell the tax office.
  
• Registration with the IHK or HWK: Depending on the activity and sector, registered merchants must register with the relevant Chamber of Commerce and Industry (IHK) or the Chamber of Crafts (HWK).
  
• Official notice: Once you’re registered, you can officially conduct business as a registered merchant. In public dealings, you must use your legal form. The suffix “e.K.” must appear on the company’s official documents, such as offers, invoices, or business letters.
  

Registration as a registered merchant: Step by step

What are the pros and cons of the registered merchant legal form?

Being a registered merchant has both benefits and drawbacks. Consider the following points carefully if you’re considering becoming a registered merchant.

Starting a business as a registered merchant is simpler and involves fewer formalities than forming a corporation. The initial costs are also financially manageable. For example, no minimum capital is required. Additionally, your business can be launched quickly. Once registered merchants have completed their business registration, they can begin operating immediately.

Registered merchants benefit from being officially recognised as a company, unlike businesses that aren't listed in the commercial register. This allows them to publicly use a name of their choice, provided it includes the suffix "e.K.". Therefore, you can still use a creative or imaginative name. Additionally, being listed in the commercial register demonstrates credibility and boosts the company's reputation. This helps registered merchants secure bank loans more easily, among other benefits.

Registered merchants do not have to publish annual financial statements. This reduces your administrative workload and ensures that your sensitive information remains private. Registered merchants also benefit from the obligation to give notice of defects ("Rügepflicht"). According to Section 377 of the Commercial Code, buyers in mutual commercial transactions must inspect the received goods right away and report any defects. If they don't do this, the goods are considered accepted, and the purchase is finalised.

Finally, registered merchants enjoy full entrepreneurial freedom. Since you are the sole owner, you can make all decisions independently. This also allows you to react swiftly and adapt to new situations with ease. Time-consuming agreement processes aren't necessary. As a result, all business profits go directly to the registered merchant.

However, the close personal connection to the business has downsides in some scenarios. If the sole owner were, for instance, absent for an extended period due to illness, the company might face challenges. There are no equivalent partners to take over responsibilities or manage the business in such cases. Additionally, registered merchants carry the full entrepreneurial risk, as this legal form does not offer any liability protection. In case of loss or damage, registered merchants are fully liable for the business’s debts with their personal assets.

Registered merchants must adhere to accounting requirements. This sets them apart from companies that are not listed in the Commercial Register. Therefore, basic bookkeeping using cash-basis accounting is not enough. Registered merchants must prepare a comprehensive balance sheet including a profit and loss statement.

Pros and cons of being a registered trader

What taxes do registered merchants have to pay?

Registered merchants must pay income tax and trade tax on their profits and submit value-added tax (VAT) to the tax office.

The profit is considered the income of the registered merchant and is taxed along with other personal income.

Registered merchants must also pay trade tax, like all other tradespeople. However, a tax-free allowance of €24,500 is applicable. Registered merchants do not have to pay trade tax on profits up to this amount. If the tax-free amount is exceeded, trade tax is only payable on profits above that amount. For example, with a profit of €30,000, only €5,500 is considered for the calculation of trade tax. The amount of trade tax depends on the registered merchant’s profit and the trade tax rate set by the relevant municipality. It’s important to note that all registered merchants must submit a trade tax return, regardless of whether or not they pay trade tax.

Registered merchants must charge VAT on goods sold and services rendered, and remit that VAT to the tax office. Businesses that are not subject to VAT or have opted for the small-scale entrepreneur rule are exempt. Stripe Tax simplifies tax collection for you by automatically collecting taxes worldwide. Stripe Tax also gives you access to all the necessary documents for tax refunds.

Other taxes might also apply to registered merchants. For instance, if you employ staff as a registered merchant, you must pay wage tax to the tax office. Additionally, if registered merchants purchase real estate, a one-time real estate transfer tax is due. Registered merchants that own developed or undeveloped land are also required to make quarterly advance property tax payments.

What accounting obligations do registered merchants have?

Registered merchants are required to maintain double-entry accounts and balance sheets. This means that income and expenses must be recorded in two separate accounts. One account tracks the movement of money, while a counterpart account records the purpose of the money received or spent. Using this double-entry bookkeeping, registered merchants prepare their balance sheet and profit and loss statement to determine their profit for annual financial statements.

If you want to simplify and automate your invoicing, and speed up your accounting processes, try Stripe Invoicing. With Stripe Invoicing, you can easily accept payments worldwide and send invoices online with just a few clicks.

What should registered merchants know about liability?

Registered merchants have extensive liability, which impacts both business and personal assets. It’s important to understand the liability risks and take appropriate measures to minimise them. Unlike corporations, there is no distinction between business and private assets for registered merchants. Unlimited liability means that both the company’s assets and the owner’s private assets are used to cover the company’s liabilities. These liabilities include loans, supplier liabilities, rental and leasing contracts, tax debts, and other financial obligations.

Additionally, registered merchants are solely and unconditionally liable for claims of damages and other third-party liability claims. In the event of legal disputes, registered merchants can be sued personally. If they lose a legal dispute, they must cover the costs incurred from their entire assets. If the business becomes insolvent or over-indebted, registered merchants must file for bankruptcy. In insolvency proceedings, both business and private assets are used to pay creditors.

To protect themselves and their private assets effectively, registered merchants should take out appropriate insurance, such as professional or public liability insurance. You can transfer assets to family members in a timely manner or set up marriage contracts to protect yourself and your private assets.