Definition: A Kleingewerbe refers in Germany to a small-scale commercial business that benefits from commercial and tax simplifications. It is not a separate legal form, but describes businesses with low turnover and profit that can usually use simplified accounting (Einnahmenüberschussrechnung, EÜR) and special VAT rules (small‑business regulation under Section 19 of the VAT Act, UStG).
Legal situation and distinction
Legally, a Kleingewerbe is not a separate status but a colloquial classification. The decisive factors are statutory rules from commercial and tax law:
- Trade registration with the competent trade office: Every commercial activity must be registered.
- Distinction from liberal professions: Freelancers (e.g. doctors, attorneys, tax advisors) are not considered trade businesses and are subject to different obligations.
- Commercial merchant status under the HGB: Only those who qualify as merchants within the meaning of the German Commercial Code (HGB) are obliged to keep double‑entry bookkeeping and prepare a balance sheet; many small businesses are exempt from this.
- Tax relevance: Special reliefs for small enterprises apply for income tax (EStG), VAT (UStG) and trade tax.
Accounting obligations and simplifications
In practice, simplified rules often apply to the accounting of Kleingewerbe:
- Cash‑basis profit calculation (Einnahmenüberschussrechnung, EÜR) under Section 4 (3) of the Income Tax Act (EStG): The vast majority of small traders may use the EÜR instead of a balance sheet — recording business income and expenses on a cash‑flow basis.
- No statutory obligation to use double‑entry bookkeeping as long as merchant status under commercial law does not apply or thresholds are not exceeded.
- Trade tax allowance: Sole proprietors and partnerships have an allowance of €24,500 for trade tax.
Practical notes on the EÜR
- Collect receipts without gaps and record receipt data (date, amount, description of goods or services, counterparty).
- Reconcile bank transactions monthly (maintain a cash book for cash transactions).
- Keep fixed assets separately: low‑value assets (GWG) up to €800 net may be expensed immediately; above that, observe depreciation (AfA).
VAT and the small‑business rule
VAT treatment is central for many small businesses:
- Small‑business rule (Section 19 UStG): They are exempt from charging VAT if turnover in the previous calendar year did not exceed €22,000 and is not expected to exceed €50,000 in the current year. Invoices must not show VAT.
- Option for standard taxation: They can opt out of the small‑business rule and choose standard taxation — then input VAT deduction and regular VAT pre‑returns are possible.
- VAT pre‑returns: The obligation to file monthly or quarterly returns depends on the VAT payment liability of the previous year (monthly for high liabilities; for very low liabilities a yearly return may suffice).
- VAT ID number (USt‑IdNr.): A VAT identification number may be required for intra‑community supplies or services.
Practical examples and typical journal entries
Concrete use cases make implementation in daily accounting easier:
Example 1: Female small‑business owner selling digital products
- Turnover in the previous year: €18,000 → small‑business rule possible.
- Invoice to a customer: €500 (no VAT). Entry (EÜR): Income €500 to business bank account — not subject to VAT.
Example 2: Purchase of a laptop (€1,200 net)
- Amount above the GWG threshold (€800 net). Record as fixed asset in the EÜR and depreciate over the useful life (AfA), e.g. 3 years → annual depreciation €400.
- Possible journal entry (simplified representation): Bank €1,200 to Fixed assets €1,200; annual depreciation: Depreciation expense €400 to Accumulated depreciation – Fixed assets €400.
Example 3: Cash sale and cash management
- Cash proceeds €150 → create a cash receipt, maintain the cash book, perform regular cash closing.
- In an audit, cash transactions must be complete and traceable.
In summary, the Kleingewerbe concept offers founders and small entrepreneurs numerous simplifications in bookkeeping and VAT. Nevertheless, correct document management, knowledge of thresholds (e.g. Section 19 UStG, GWG rules, trade tax allowance) and the correct decision for or against the small‑business rule are important. If in doubt, consult a tax advisor to avoid individual disadvantages and to make optimal use of tax planning opportunities.