However, before launching a business in Berlin, one crucial decision must be made: Which legal structure is the best fit? In Germany, there are different types of business structures, but for many self-employed individuals, the choice comes down to two main options: working as a freelancer (Freiberufler) or establishing a GmbH (Gesellschaft mit beschränkter Haftung, or Limited Liability Company).
This decision has significant implications not only for the flexibility of the business but also for tax obligations, legal responsibilities, and administrative requirements. While freelancers benefit from lower bureaucracy and tax advantages, a GmbH provides greater financial security and credibility. But which option is more tax-efficient? What are the financial risks involved? And what common mistakes should be avoided?
In this article, we provide a comprehensive comparison of freelancers and GmbHs in Germany, focusing on tax obligations. We explain the different types of taxes involved, the administrative processes required, and the advantages and disadvantages of each business structure. Whether you’re just starting your self-employment journey or considering transitioning your freelance work into a GmbH, this guide will help you make an informed decision.
1. What is a Freelancer (Freiberufler)?
Freelancers are self-employed professionals who engage in specific types of activities as defined under § 18 of the German Income Tax Act (EStG). These typically include:
- Doctors, dentists, naturopaths
- Lawyers, tax advisors, auditors
- Journalists, artists, translators
- IT consultants, designers
One major advantage of being a freelancer is that they do not have to pay trade tax (Gewerbesteuer) and are exempt from many administrative obligations.
Tax Obligations for Freelancers
- Income Tax (Einkommensteuer): Freelancers pay income tax on their profits (progressive tax rate up to 45%).
- Value-Added Tax (VAT or Umsatzsteuer): Freelancers must charge VAT (either 19% or 7%, depending on their services), unless they qualify for the small business regulation (§ 19 UStG).
- No Trade Tax (Gewerbesteuer): Since freelancers are not classified as tradespeople, they are exempt from trade tax.
2. What is a GmbH?
A GmbH (Gesellschaft mit beschränkter Haftung) is a separate legal entity with limited liability. It is a popular choice for businesses with higher profits, multiple partners, or those seeking credibility with larger clients.
Tax Obligations for a GmbH
- Corporate Tax (Körperschaftsteuer): GmbHs pay a corporate tax of 15% on their profits.
- Trade Tax (Gewerbesteuer): GmbHs must pay trade tax, which varies between 14% and 17% depending on the municipality (in Berlin, it’s approximately 14.35%).
- Value-Added Tax (Umsatzsteuer): GmbHs must charge VAT at either 19% or 7%, depending on the type of service.
- Payroll Tax (Lohnsteuer, if hiring employees): A GmbH must withhold payroll tax for any employees, including salaries paid to its managing director.
3. Key Differences Between Freelancers and GmbHs
| Criteria | Freelancer (Freiberufler) | GmbH |
|---|---|---|
| Liability | Personal liability | Limited liability (separate legal entity) |
| Taxation | Income tax (up to 45%), no trade tax | Corporate tax (15%), trade tax (approx. 14–17%) |
| Administrative Burden | Simple, less bureaucracy | High administrative requirements |
| VAT (Umsatzsteuer) | 19% or 7% (exemption possible for small businesses) | 19% or 7% |
| Capital Requirement | No minimum capital required | Minimum €25,000 share capital required |
| Registration Process | Easy registration with the tax office (Finanzamt) | Notarized incorporation, entry into the Commercial Register (Handelsregister) |
4. Which Option is Best for Your Business?
The choice between Freelancer and GmbH depends on various factors:
- Looking for lower costs and flexibility? → Being a freelancer is the better choice.
- Want to limit personal liability and scale your business? → A GmbH offers more protection.
- Expecting high profits? → A GmbH can be more tax-efficient in some cases.
- Clients prefer working with incorporated businesses? → A GmbH can offer more credibility.
5. Conclusion: Tax Planning is Essential
Regardless of which business structure you choose, careful tax planning is essential. A tax consultant (Steuerberater) can help you choose the optimal structure and maximize tax benefits.
If you work internationally as a freelancer or run a GmbH, you may need official translations of your tax documents. Our agency, Berlin Translate, specializes in certified translations of financial and legal documents into over 50 languages.
Useful Links for Entrepreneurs in Berlin:
- Berlin Tax Office (Finanzamt Berlin)
- Berlin Chamber of Commerce and Industry (IHK Berlin)
- Federal Central Tax Office (Bundeszentralamt für Steuern)
Need professional translations for your tax documents? Contact Berlin Translate today!
