Small Business Owners: Everything You Need to Know

When it comes to starting a business, you will likely come across the term “small business owner.” As tax advisors in Düsseldorf and Oberhausen, we would like to help you understand the distinction between this form of entrepreneurship (which also has tax implications). In the specific case of small business owners, confusion often arises with the term “small-scale business.” Therefore, we would first like to briefly explain the difference between the two terms and, building on that, provide an overview of small business owners. If you are a new business owner or are considering starting a business, you should definitely be familiar with these fundamental differences.

Small Business Owner vs. Small-Scale Business

Small business owner and small business. They sound similar, but there are some fundamental differences. To put it plainly: these two terms have nothing to do with each other. The regulations for small business owners are enshrined in the Value-Added Tax Act, while the laws for small businesses are found in the Commercial Code. The regulations for small business owners affect value-added tax. The term “small business” primarily defines how accounting obligations are handled and the scope of a company. The two topics therefore only share a similar name and should never be confused. If you are still unsure about such issues as part of your business startup, please feel free to contact our tax advisors in Düsseldorf. Now that you know the difference, we can focus more closely on the status of a small business owner.

Who is considered a small business owner?

First, the most important question must be clarified: Who is considered a small business owner, and under what circumstances? Small business owners can be both business owners and freelancers. Who is eligible for small business status is governed by the Value-Added Tax Act (UStG). Section 19 covers “Taxation for Small Businesses.” As tax advisors in Düsseldorf, we repeatedly see how important it is for our clients to understand these nuances.

For small business owners, everything obviously revolves around sales tax. As a small business owner, you can opt out of collecting this tax and are therefore not required to remit sales tax to the tax office. This is why you may not see sales tax listed on some invoices you receive from small business owners. Instead, the document states that the issuer is waiving the collection of this tax in accordance with the small business regulation. Consequently, as the recipient of the invoice, you cannot claim any amount for this invoice in your advance VAT return. An entrepreneur falls under the small business regulation if their revenue, including sales tax, did not exceed 17,500 euros in the previous fiscal year and revenue in the current fiscal year will not exceed the 60,000-euro threshold. So if you have just started your business, you naturally have no revenue from the previous year. Therefore, in this case, the €17,500 limit applies to the first year’s revenue; however, it should be noted that if a taxpayer only began their commercial or freelance activity during the course of the year, they are only considered a small business owner if their revenue, when extrapolated to a full-year total, is not expected to exceed 17,500 euros

For many founders, therefore, the small business regulation is unlikely to be the right solution, as this threshold is quickly exceeded. If, on the other hand, you are initially starting a business on a part-time basis, this offers an interesting option.

Registering with the tax office as a small business owner

If you now wish to become a small business owner as a new entrepreneur, you must notify the tax office. In connection with the business setup, you will receive a multi-page questionnaire from the tax office regarding tax registration. There, you must provide numerous details about your business. You must also provide so-called projected figures. These refer to the revenue you expect to generate in the future. Finally, you must check a box to indicate whether you wish to be classified as a small business owner. Of course, this requires that you remain within the revenue limits.

The scope of this registration is relatively complex. Therefore, it may make sense to fill out the forms together with a tax advisor. As your tax advisor in Düsseldorf and Oberhausen, we are happy to assist you with this matter and help you avoid common mistakes.

Legal Structure for Small Business Owners

Small business status does not affect the choice of legal form. This means you can choose any legal form if you wish to be a small business owner. As your tax advisor in Düsseldorf, we can work with you to determine which legal form is right for you.

Advantages and disadvantages for small business owners

As you already know, small business status has a major impact on sales tax. This allows you to offer your products at lower prices than the competition because, as is well known, sales tax does not apply.

Since you, as a small business owner, do not have to pay sales tax, the monthly sales tax return is also eliminated. This will simplify your bookkeeping at the start. Nevertheless, there are many complex aspects that you should discuss with us as your tax advisors in Düsseldorf and Oberhausen.

When you purchase business equipment as an entrepreneur, you normally receive a refund of the sales tax paid from the tax office. This does not apply to small businesses if you opt out of sales tax! Consequently, such investments become significantly more expensive for you as a small business owner. Talk to our experts and determine which option is more beneficial for you.

Turnover threshold exceeded: What now?

As a small business owner, you’re probably wondering what happens if you exceed the revenue thresholds. This is particularly problematic if you don’t have a clear overview of your revenue. Let’s assume, for example, that you think your revenue for last year was 15,000 euros. However, you didn’t keep consistent books, and it only comes to light later in the year when filing your tax return that your revenue was actually 25,000 euros. Now you’re facing a problem: you were “illegally” classified as a small business owner for several months. The result: you retroactively lose your small business status. The tax office will therefore reclaim the full amount of taxes from you. You will then have to pay this out of your own pocket. Depending on the size of the discrepancy, the sum can quickly become a threat to your livelihood.

To help you avoid such a situation, we’re here for you as tax advisors in Düsseldorf and Oberhausen. Especially new business owners with little experience should seek help from a tax advisor. If you have questions about this topic or starting a business in general, feel free to contact us!