Turning a sole proprietorship into a GmbH or AG

Many entrepreneurs start out as a sole proprietorship and, as the business grows, come to weigh a move to a capital-based form (GmbH or AG). It is a choice that reflects corporate maturity, not just tax considerations. Let us look at how it works in Switzerland, without unnecessary jargon.

Why move from a sole proprietorship to a company

The sole proprietorship is simple and quick, but it has a structural limit: the entrepreneur is liable for the business’s debts with their entire personal assets. There is no separation between the business and the individual.

With a GmbH or an AG, liability is limited to the capital contributed. To this are added other advantages:

• a more institutional image towards clients, suppliers and banks;
• the possibility of bringing in partners or investors;
• more flexible planning between salary and dividends;
• continuity of the business, independent of the owner as a person.

The typical moment for the switch is when turnover grows, the first employees are hired, or the owner wants to protect their private assets.

It is not an automatic “conversion”

In Switzerland a sole proprietorship does not legally transform into a GmbH or AG through a simple change of form. A new capital company is set up and the existing business is contributed to it. Technically these are two operations: the creation of the new company and the transfer of the business.

The transfer can happen in two main ways:

1. Contribution in kind: the business (assets, client base, contracts and possibly liabilities) is brought in as capital of the new company. This requires a valuation and a report, as well as a description in the articles of incorporation.
2. Acquisition for consideration: the new company buys the business by paying a price, which may remain as a receivable of the owner towards the company.

In both cases the Merger Act applies, which governs the transfer of assets from a proprietorship to a company.

The tax aspects to weigh

The most delicate point is the taxation of the transfer. If the business is contributed while respecting book values and continuing the activity, in many cases a tax-neutral transfer is possible, without immediately taxing the hidden reserves. The conditions must, however, be checked case by case with the competent cantonal authority.

Watch out also for:

• VAT: the transfer of a going concern can benefit from the notification procedure, avoiding tax on the transaction;
• VAT registration threshold (CHF 100,000 of turnover): it remains in force for the new company;
• withholding tax and the treatment of reserves: relevant especially in the AG.

An error in the valuation or in the structure of the contribution can generate an avoidable tax burden. It is worth setting up the operation carefully from the very start.

GmbH or AG: which to choose

The choice depends on your plans:

• the GmbH requires a minimum capital of CHF 20,000, fully paid in, and is ideal for operational activities that start lean;
• the AG requires CHF 100,000 (of which at least CHF 50,000 paid in) and is better suited if you expect investors, a broad shareholder base or a more institutional profile.

Those coming from a well-established proprietorship often already have enough assets to release the capital through a contribution in kind of the business itself.

The steps in practice

1. Checking the most suitable legal form and the tax effects.
2. An up-to-date accounting position and a valuation of the business.
3. Opening the capital account (for the cash portion).
4. Notarised articles of incorporation with a description of the contribution.
5. Entry in the commercial register and transfer of contracts, VAT and social insurance.
6. Closure of the sole proprietorship.

Timing varies, but with the documentation ready the operation is generally completed in a few weeks.

How we help you

We analyse your proprietorship, calculate the tax effects of the move and structure the contribution in the most efficient way — incorporation from CHF 0 (combined with a 12-month accounting mandate) and clearly written terms. Let’s talk about your move to a company.