Develop visions, work out strategies and just get started! To start their own business, more and more people are choosing the direct route and foregoing years of planning.
Many start with little capital and grow as they can. Starting a small business is quick and easy, so the business idea can be realized in a timely manner.
Small business and small business – these terms should not be confused as they have a completely different meaning.
We shed light on the matter for you and explain the most important differences between small business owners and small businesses.
Table of contents:
- Small business: what is it?
- Small business: what is it?
- Small business: duties & rules
- The company is growing: How long do you retain small business status?
- Have you exceeded your profit or sales limits?
Small businesses and small businesses: what is the meaning behind it?
Small business is a designation from the sales tax law. Up to an annual turnover of 22,000 euros, a small business does not have to show sales tax on invoices.This significantly reduces the bureaucratic and financial effort. There are also noticeable price advantages compared to the competition in the private customer market.
Due to the small size of the business, a trader does not have to follow the complex requirements of the Commercial Code. This eliminates the need for double-entry bookkeeping, for example.
In short: For VAT purposes, small businesses that operate a business are also small businesses.Conversely, this is not always the case, because small businesses are only small businesses if the previous year’s turnover was less than 22,000 euros.There are also numerous small business owners who do not operate a business. For example, freelancers are not considered traders.That’s why freelancers don’t run a small business, but can make use of the small business regulation if their sales are low.
Regardless of whether they are a business or a freelancer: small businesses and small businesses must submit an income surplus invoice (EÜR) to the tax office.
With an EÜR you determine the profit.The profit, together with other income, forms the basis for calculating income tax.
Small business: what is it?
Now we will look at sales tax law. The regulation for small businesses is described in Section 19 of the Sales Tax Act (UStG).
Accordingly, the small business regulation applies as long as sales in the previous year are less than 22,000 euros.In the current year, sales may not be higher than 50,000 euros.
What are the advantages of small business status?
The following advantages come into play when small business status applies:
- no showing of sales tax on invoices
- Therefore, no consideration of the correct sales tax rate is necessary
- No monthly advance VAT return required
- Payment of sales tax revenue to the tax office is no longer necessary
On the other hand, you will not receive a refund from the tax authorities for the sales tax you paid. The so-called input tax describes the sales tax portion that you pay on business expenses.
Small business: what is it?
As a small business owner, you run a commercial business that is not bound by the regulations of the Commercial Code. Commercial companies are essentially merchants.
These companies are obliged to follow complex commercial requirements. An exception exists if the scope and nature of the operation do not require a business transaction set up in a commercial manner.
This results in a lot of relief for small businesses:
- no entry in the commercial register
- double commercial accounting is no longer necessary
- Balance sheet not required
- No need to comply with special commercial regulations and industry requirements
Attention: Small businesses are not considered merchants, but they are considered entrepreneurs. For example, in connection with your commercial self-employment, you cannot rely on consumer protection rules. In private dealings, you as a consumer are entitled to the 14-day right of return for mail order business.
Small business: duties & rules
The legal basis for small businesses can be found in the Civil Code, the Tax Code, the Trade Code and other social and tax laws.
You can avoid the commercial details, but there are a lot of things you have to deal with when setting up and running a small business:
- Business registration
- Inform the tax office about your activity (fill out the tax registration questionnaire)
- Send monthly advance VAT return to the tax office (exception: small business status)
- Filing annual sales, income and business tax returns
- Compulsory membership in the relevant chamber
- When employing employees: Applying for a company number from the employment agency and registering the employees with the health insurance company and professional association
- Payment of trade tax if the trade income exceeds the amount of 24,500 euros
The company is growing: How long do you retain small business status?
The good information in advance: You only have to be entered in the commercial register at the beginning if you set up a capital or commercial company.
You are therefore automatically considered a merchant and must comply with the provisions of the Commercial Code.
If you don’t start a trading or corporation, you can initially assume that you are running a small business for the time being.
Even if you and a partner form a partnership under civil law (GbR), your small business status remains in effect until further notice.
According to Section 141 of the Tax Code, the obligation to carry out commercial accounting and bookkeeping arises from an annual turnover of 600,000 euros or profits from commercial operations of more than 60,000 euros.
In addition, the merchant status is examined overall using complex criteria.
These include the following points:
- Business assets
- Number of employees
- Use of borrowed capital
- Number of business transactions
It is not possible to specify generally valid values or numbers for the various criteria. However, you don’t have to accept any unpleasant surprises retroactively.
Have you exceeded your profit or sales limits?
Congratulations on the company’s success! You will simply be asked by the tax authorities to follow the commercial regulations in the future.
There is no reason to rush here, as the change will only apply from the year following the official request. Before this happens, you will have long since brought a “real” company to life for liability and tax reasons.
It is best to discuss these complex processes with your representative Tax Consultants .
