From sole proprietorship to GmbH: when the switch pays off

A sole proprietorship is the quickest and lightest way to get started: no minimum capital, minimal formalities, immediate decisions. But it only grows with you up to a point. As turnover rises, risks increase and tax needs change, many entrepreneurs wonder whether the time has come to move to a GmbH. Let’s look at when the switch really pays off and what it involves.

The limits of the sole proprietorship

The sole proprietorship has two features that, once a certain threshold is passed, become a burden:

• Unlimited liability: the owner is liable with their entire personal assets for the business’s debts. There is no separation between private and business spheres.
• Income taxed in the person’s hands: profits are the owner’s personal income and count towards their taxable income, with the progressive rate rising as earnings grow.

As long as the business is small and low-risk, these aspects are manageable. When the business grows, they weigh heavily.

What changes with a GmbH

The GmbH is an autonomous legal entity. The key change is limited liability: in principle the company is liable for debts with its own assets, not the partner with their personal property. To this are added other elements:

• a minimum share capital of CHF 20,000, fully paid in;
• a defined governance structure (members’ meeting, management);
• the possibility of remunerating the managing partner with salary and/or dividends, with different tax effects;
• a greater perception of solidity towards banks, clients and suppliers.

In exchange, the GmbH requires more formalities: orderly accounting, annual closings, registration of members in the commercial register, social-insurance obligations for those employed by their own company.

When the switch pays off

There is no magic threshold valid for everyone, but certain signs indicate the moment is ripe:

• Risk has grown: significant contracts, investments, debts, liability towards third parties. Limited liability becomes concrete protection.
• Profits are high and stable: above a certain level, the salary-dividend combination in a GmbH can be more efficient than full taxation as personal income. The numbers must be calculated for the specific case and canton.
• You want to bring in partners or investors: the GmbH’s quota structure makes the entry of third parties orderly, something impossible in a sole proprietorship.
• You are thinking of a future sale: selling quotas is simpler than transferring a sole proprietorship.
• You need to clearly separate personal and business assets.

Conversely, if the business is small, low-risk and with modest profits, the sole proprietorship often remains the most efficient choice: fewer costs, fewer formalities.

The question of VAT and accounting

Certain thresholds apply regardless of legal form and should be kept in mind on the growth path:

• VAT liability kicks in once CHF 100,000 in annual turnover is exceeded (standard rate 8.1% from 2024);
• the obligation of full accounting (with income statement, balance sheet and notes) kicks in above CHF 500,000 in turnover; below that threshold, simplified accounting of income and expenditure is allowed.

Anyone approaching these figures with a sole proprietorship is already facing the complexity of a larger structure: it is often the right moment to consider the GmbH.

How the transition happens

The transition is not a simple “name change”. In practice, a new GmbH is set up and the sole proprietorship’s business is transferred to it. The typical steps are:

1. Valuation of the business and of the elements to be transferred (client base, contracts, capital goods, inventory).
2. Incorporation of the GmbH with articles of association, payment of capital into a blocked account and a notarial deed.
3. Contribution of the business: the sole proprietorship can be brought into the GmbH as a contribution in kind, with a report and documentation of the values.
4. Registration in the commercial register of the new company.
5. Migration of relationships: VAT, social insurance, banks, contracts with clients and suppliers, taking over employment relationships.
6. Closure or cessation of the sole proprietorship.

The Merger Act provides instruments that, under certain conditions, allow the transfer to be carried out in a tax-neutral way, without immediately triggering hidden reserves. The exact conditions must be verified case by case: this is the most delicate point of the operation.

In summary

Moving from a sole proprietorship to a GmbH pays off when risk, profits or ambitions exceed what a sole-proprietor structure can bear: limited liability, tax optimisation and openness to partners are the three drivers of the switch. But it must be done at the right time and with a well-designed transfer, so as not to pay unnecessary taxes on hidden reserves.

Want to understand whether and how to make the switch to a GmbH without tax surprises? SIH ONE’s incorporation service assesses whether it’s worthwhile and handles the transition from start to finish.