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Start-up of a sideline business

The start-up of a sideline business is a special form of a small business start-up. The entrepreneur in this case works as an employee on a full-time basis, for example, and becomes self-employed on a part-time basis. Another form of starting up a sideline business exists if the company established is not a full-time business start-up. This means that the returns are not sufficient to entirely finance the entrepreneur's livelihood.

Advantages and disadvantages

The start-up of a sideline business offers entrepreneurs many opportunities, but is not without risks.

Advantages:

  • Reduced risks
  • Low financial requirements
  • Test phase (being self-employed despite having a permanent employment contract)
  • Less time required than in a “full-time company”
  • Additional income on top of the employment earnings

Disadvantages:

  • Potential lack of qualifications in the area of the new business concept
  • Insufficient business-related testing of the concept
  • Financing problems and insufficient securities
  • Lack of contacts in the banking sector

Specifics of starting up a sideline business

You must observe a few specifics when starting up a sideline business, for example in the area of social insurance. Employees who run a sideline business pay half of their social insurance contributions themselves, just like all employees. Employers are responsible for the other half. The Federal Employment Agency covers social insurance contributions for the unemployed.

There are also specifics with regard to the chamber contributions. If you stay below a specific annual profit or annual trade income, you can be exempted from the payment of the earnings-related share of the cost to the Chamber of Industry and Commerce and from the payment of the additional amount to the Chamber of Traces under certain circumstances.

Most of the funding is only granted for full-time business start-ups. The “ERP-Gründerkredit - StartGeld” (ERP Start-up loan - Start-up money) and “Startfinanzierung 80 der L-Bank” (Start-up financing 80 from the L-Bank) public funding programmes are available to individuals wanting to become self-employed on a part-time basis.

The simplest legal form for individuals starting up small businesses is a sole proprietorship. If you set up a sideline company together with others, you automatically form a partnership under civil law (GbR).

Individuals starting up a sideline business also need to keep records:

  • The basic business transactions (revenue and expenditure) associated with the company should all be recorded in a cash journal on a daily basis. The cash reserve calculated from the cash journal must agree with the actual amount of cash.
  • Every commercial business is obliged to record data for purchased semi-finished and finished goods, but also for raw and auxiliary materials (date, supplier, description of goods, price, receipt). A purchase journal must be used if no double-entry accounting is set up.
  • An outgoing goods journal only needs to be kept if. for example, you supply goods to other commercial companies as a wholesaler. The date, customer, description of goods, price and receipt must be recorded.

The net income method (profit = surplus of operating revenue over operating expenditure) is a simplified method of calculating profit. However, this method is only permissible for tax purposes as long as the Tax Office does not determine that the turnover is higher than € 500,000 or the commercial gain is higher than € 50,000 in the respective financial year.

You must pay tax on profit from commercial or self-employed activities. In this way the Treasury benefits from the entrepreneurial activity of each individual. The profit is subject to income tax in the case of partnerships and sole proprietorships and corporation tax in the case of public limited companies. All commercial companies must also observe trade tax. The tax law either stipulates the net income method or the balancing of accounts/double-entry accounting to determine the profit.

The Tax Office does not accept ongoing losses in the long run for self-employed activities in a sideline business. Instead of self-employment, it assumes that the activity is a hobby, for which there is no tax relief. Operating expenditure can be recovered if it is tax deductible. Individuals running a sideline business must pay tax on the joint value of both incomes. You should consider the following points when planning to start up a sideline business:

  • The business concept should be viable with low running costs (e.g. rent) and investments (e.g. office equipment).
  • Solid costing and price fixing needs to be observed.
  • It is necessary to ensure that the company can actually be operated on an hourly basis with this business concept. This is unrealistic, for example, with a retail business.
  • The business concept should demonstrate further development potential.
  • Sideline businesses that are established must also be registered with the Trade Office and other legal regulations must be observed.
  • Your employer governs whether and to what extent you may take on a self-employed activity alongside employment that is subject to social security contributions. Please obtain information about this.
  • The employer must agree to the additional self-employed activity in some cases.
  • The business concept may not be in competition with the employer's company.

Release note

The German original version of this text was drafted in close cooperation with the relevant departments. The Wirtschaftsministerium released it on 03.06.2024. Only the German text is legally binding. The Federal State does not assume any liability for the translated texts.

In cases of doubt or if you have any questions or problems, please contact the relevant authorities directly.