Becoming a Freelancer: How to Start Your Own Business Successfully in 2022

Many people interested in freelancing wonder how to begin their work as a freelancer in practical terms. Which aspects deserve attention during the preparation phase? What tax obligations arise? How do members of the liberal professions register their activity? In this guide we explain the path to a freelance career!

Before you initiate the start-up process, there are several points to consider. Ask yourself above all whether freelance work suits you. Some people only see the opportunities — such as independence — and ignore the risks. As a freelancer, unlike in a salaried, social-insurance-liable employment, you are taking a risk.

Whilst as an employee you earn a predictable income, the earnings of self-employed individuals are subject to fluctuations. You should take this into account: if you can cope with a degree of uncertainty and have the organisational talent for self-employment, there is nothing standing in the way of setting up as a freelancer!

Even the best business idea does not automatically lead to commercial success. Establishing yourself as a freelancer depends on numerous factors — thorough preparation minimises the risks and allows you to fully realise the potential of a freelance career.

The preparation phase is about giving your business idea concrete form. A mere idea becomes a detailed business concept covering every aspect of self-employment. The range extends from financing and legal form to marketing. We present two important points:

Freelancer status says nothing in itself about the legal form of your business. You determine this before setting up; weigh up the advantages and disadvantages of the different options. The legal form has an impact above all on taxes, the type of bookkeeping required, and liability.

The following options are available:

• Sole trader (Einzelunternehmer)
• Professional partnership (Partnergesellschaft)
• Civil-law partnership (Gesellschaft bürgerlichen Rechts, GbR)
• Incorporated companies such as a GmbH

As a sole trader you pay income tax on your profit and are personally liable with all your business and private assets. You document your income and expenditure using simple bookkeeping.

Do not confuse the sole trader with a solo self-employed person: as a sole trader you can employ staff! This term describes the legal form; it does not refer to the structure of your business.

Professional partnerships (Partnergesellschaften) and GbRs are suitable when several freelancers wish to join forces. As with a sole trader, profit shares are subject to each partner's individual income tax rate, the partners' liability is unlimited, and the cash-basis income statement (EÜR) suffices for profit calculation.

There is now also the option for these partnerships to elect to be taxed under corporation tax instead. However, trade tax then automatically applies — as a rule, the corporation tax option brings disadvantages!

If you opt for an incorporated company such as a GmbH, you benefit from limited liability. You can lose at most your capital contribution. However, you forfeit important advantages of freelance activity.

You must pay corporation tax plus trade tax and are required to use double-entry bookkeeping. Guhr Steuerberatung will explain all of this to you in a detailed consultation!

Adequate financing of a new business is of great importance. However, the conditions in the liberal professions vary considerably: in the IT and new media sector, for example, many freelancers work from home.

For them, a laptop or a PC is sufficient equipment. The financial requirement is correspondingly manageable, and most founders can dispense with a specific financing concept for their venture.

The situation is different when prospective freelancers need to acquire expensive equipment and software. In these cases, loan financing may be necessary. The same applies to freelancers who need to rent and fit out office space. Employing additional staff also creates a financial need, as self-employed individuals in the start-up phase do not initially cover their costs.

You may need a development loan or bank loan to provide the liquidity to survive the first few months financially. Does this apply to you? Start by determining your financial needs precisely! Then compare a range of financing options and consider alternatives such as leasing, invoice factoring and supplier credit. The experts at Guhr Steuerberatung will explain the tax implications!

For freelancers, the administrative burden of registration is minimal: notify the tax office responsible for the location of your place of business no later than four weeks after commencing your business activity. The authority accepts an informal letter.

Ideally, use the questionnaire provided by tax offices, on which you give details of your freelance activity and all key information such as address and bank details. On this questionnaire you also inform your tax office whether you wish to use the Kleinunternehmer (small-business) scheme.

As a new business owner you have a choice with regard to VAT: you can be exempted from VAT liability if your turnover in the year of founding does not exceed 22,000 euros and in the following year does not exceed 50,000 euros.

You may estimate the turnover. As a Kleinunternehmer you do not have to remit VAT to the tax office, you may not show VAT on your invoices, and you may not reclaim input tax.

Many people use the Kleinunternehmer scheme because it significantly reduces the administrative burden. If you choose not to use this scheme, you are bound by that decision for five years. Both options have advantages and disadvantages, and the right choice depends on the individual case: contact the experts at Guhr Steuerberatung for detailed advice!

Free initial consultation

Taxes not your thing? Then they're ours.

Guhr Steuerberatung handles your bookkeeping, tax returns and tax planning – so you can focus on your business.

Request a consultation

• Image source: William Fortunato - Pexels.com