Many businesses in Switzerland start as sole proprietorships. But as turnover increases, risks grow or future plans become more ambitious, an important question arises: Is a sole proprietorship still the right legal structure – or would a GmbH be more appropriate?
A sole proprietorship is often a practical choice when starting a business. It is comparatively straightforward to establish, requires no statutory minimum capital and involves relatively little administrative effort. These advantages make it attractive to many entrepreneurs.
As the business develops, however, its requirements change. Liability becomes more important, employees may be hired, profits increase or succession planning becomes relevant. At that point, it is worth reassessing whether the existing legal structure still fits the business.
The Key Difference: Separating the Business from the Individual
With a sole proprietorship, the business and its owner are closely connected from a legal perspective. The owner personally bears the entrepreneurial risk. Business liabilities can therefore generally also affect the owner’s private assets.
A GmbH, by contrast, is a separate legal entity. As a general rule, the company’s assets are liable for its obligations. Once the share capital has been fully paid in, shareholders are generally not personally liable for the company’s debts, subject in particular to any additional contribution obligations defined in the articles of association and personal liability arising from individual conduct.
As a business grows, enters into larger contracts, employs staff or assumes greater financial obligations, this separation can become an important reason to reconsider its legal structure.
A GmbH does not eliminate business risks – but it generally creates a clearer separation between those risks and the shareholders’ private assets.
Taxes: A GmbH Is Not Automatically More Tax-Efficient
One of the most common reasons for considering a GmbH is the expectation of lower taxes. In practice, however, the calculation is more complex.
With a sole proprietorship, the business profit is attributed directly to the owner and taxed as part of their personal income.
A GmbH is treated differently. The company is a separate taxpayer and pays tax on its own profit and capital. The owner may receive a salary and, where appropriate, dividends. Salary is taxed as personal income and is generally a business expense for the GmbH. Distributed profits, on the other hand, may be taxed first at company level and subsequently at shareholder level.
Whether a GmbH ultimately provides a tax advantage therefore depends on several factors, including:
- the level and development of business profits
- the amount of income required privately
- the relationship between salary, retained profits and potential dividends
- the owner’s place of residence and the company’s registered office
- pension arrangements
- the owner’s overall income and asset situation
General rules such as “a GmbH becomes worthwhile from CHF 100,000 of profit” are therefore too simplistic. A comparison based on the actual tax and social-security situation provides a much more reliable basis for a decision.
Social Security Changes Significantly
This is an aspect of changing legal structure that is often underestimated.
Owners of sole proprietorships are generally considered self-employed for Swiss social-security purposes. They settle their AHV/AVS, IV/AI and EO/APG contributions directly with the relevant compensation office. Self-employed persons are also not automatically covered by all of the insurance and occupational pension arrangements applicable to employees.
The situation changes with a GmbH. Someone working for their own GmbH and receiving a salary is generally treated as an employee of the company for social-security purposes. The corresponding obligations for the company as employer and the individual as employee therefore need to be taken into account.
This creates additional administration and potentially additional costs, but it can also provide a more structured framework for insurance and occupational pension planning.
Entrepreneurs who withdrew occupational pension assets when becoming self-employed should assess their individual situation particularly carefully when changing legal structure.
CHF 20,000 Share Capital – But the Money Is Not Simply “Gone”
A sole proprietorship has no statutory minimum capital requirement. A GmbH, on the other hand, requires share capital of at least CHF 20,000, which must be fully paid in when the company is established.
A common misconception is that these CHF 20,000 are simply a cost of establishing the company.
They are not.
Once the GmbH has been established, the capital is generally available to the company for its business activities. However, it then belongs to the company rather than privately to the shareholders.
In addition to the share capital, incorporation involves other expenses, including notarial and commercial-register costs as well as possible advisory fees. Ongoing administration is also generally more extensive than for a sole proprietorship.
Growth Changes the Requirements
Taxes and liability are not the only reasons to reconsider the legal structure.
A GmbH may become increasingly appropriate when the business is intended to operate more independently of its founder. As a separate legal entity, it also allows additional shareholders to participate through company shares.
This can become particularly relevant when:
Employees are hired.
As the business grows, responsibilities, insurance requirements and organisational demands increase.
Additional shareholders are to join the business.
A GmbH provides a defined legal framework for several people to hold an interest in the company.
Larger contracts or investments are planned.
As financial obligations increase, separating private and business assets can become increasingly important.
Succession is becoming a consideration.
A sole proprietorship is directly linked to its owner. In a GmbH, company shares can be transferred, which can provide a clearer structure for future succession planning.
The company should become more independent of the founder.
For a growing business, a separate legal entity can provide a clearer corporate structure for business partners, banks and potential investors. However, the legal form itself is not a guarantee of quality and should not be the sole reason for making the change.
How Does the Conversion Work?
Changing legal form should not simply be viewed as closing a sole proprietorship and opening a new GmbH.
Depending on the circumstances, the existing business’s assets and liabilities can be contributed or transferred to the new company. Book values, hidden reserves, contracts, VAT, employees and potential tax consequences may all need to be considered.
Under certain conditions, transferring a sole proprietorship to a corporation can take place on a tax-neutral basis. Specific statutory requirements must be met, however, and restrictions or holding periods may apply.
For an established business in particular, the conversion should therefore be planned from a tax, accounting and legal perspective before it is implemented.
When Does a GmbH Become Worth Considering?
There is no single turnover or profit figure at which a GmbH automatically becomes the better legal structure. In practice, however, the arguments for reassessing the structure become stronger when several developments occur at the same time.
Business risks are increasing.
As contracts, obligations and potential liability risks become larger, separating private and business assets can become increasingly important.
The business is generating sustainably higher profits.
This is a good point to compare the tax and social-security consequences of the two structures using actual figures.
The company is hiring employees or becoming more complex.
A clearer corporate structure may become useful as the organisation grows.
Part of the profit is intended to remain in the business.
The separate taxation of a GmbH provides different options for financial planning compared with a sole proprietorship.
New shareholders or succession planning are becoming relevant.
A GmbH provides a structure in which ownership interests can be clearly defined.
What Should You Review Before Making the Change?
Before converting a sole proprietorship into a GmbH, it is worth looking at the overall picture rather than focusing exclusively on taxes.
In particular, taxes, AHV/AVS and other social-security contributions, occupational pension arrangements, the desired entrepreneur’s salary, liability risks, share capital, additional administrative costs and the future development of the business should be considered together.
A GmbH is not inherently better than a sole proprietorship. It is simply a different corporate structure – with different advantages, obligations and costs.
The Right Time Depends on Your Situation
For a young business with manageable risks and relatively straightforward circumstances, a sole proprietorship may continue to be an efficient and appropriate structure.
As the business grows, however, the circumstances change.
The key question should therefore not be:
“At what turnover do I need a GmbH?”
but rather:
“Does my current legal structure still fit my business and my future plans?”
The answer depends on the company’s figures, risks, ownership structure and the entrepreneur’s personal situation.
Carlino Trust supports you in assessing the appropriate legal structure and in converting a sole proprietorship into a GmbH. We compare the tax and social-security implications, assess the existing business structure and help you plan the next steps.
We would be pleased to discuss your situation with you in a personal initial consultation.