From Sole Proprietorship to LLC: Legal, Tax and Practical Aspects of Business Transformation in Switzerland

Many entrepreneurs in Switzerland start their business as a sole proprietorship – a flexible and straightforward legal structure. However, as the business grows, along with liability and the need for professional structures, it often becomes relevant to convert into an LLC (GmbH).

This article outlines the key legal, tax and practical aspects of this transformation.

‍

Legal Foundations of the Transformation

There are essentially two ways to convert a sole proprietorship into an LLC:

‍

Direct Transformation under the Merger Act (FusG)

Since the Merger Act (FusG) came into effect, a legal transformation of a sole proprietorship into an LLC is possible under specific conditions:

• The sole proprietorship is registered in the Commercial Register.
• The owner transfers the entire business assets and liabilities to the LLC (universal succession).
• The owner becomes a shareholder in the LLC (no change in ownership).
• The sole proprietorship must not be over-indebted at the time of the transformation.

This transformation is carried out formally and legally:

• Articles of association
• Transformation report
• Notarisation
• Possibly an audit report by a certified auditor

However, this approach is relatively complex and time-consuming.‍

‍

Economic Transformation – Creation of a New LLC

In practice, the most common method is a so-called economic transformation, which is not a legal conversion:

• The sole proprietorship is closed.
• A new LLC is founded.
• The existing business assets are contributed in kind to the new company.

‍

Formation of the LLC with Contribution in Kind

The most common route is through a contribution in kind. The business owner contributes some or all of the business assets (e.g. machinery, vehicles, inventory, customer base) to the newly formed LLC.

‍

Requirements:

• Valuation of assets by a certified auditor or trustee
• Deed of incorporation, articles of association, and contribution agreement
• Registration of the LLC in the Commercial Register

‍

Tax Implications

‍

Transfer of Hidden Reserves

Transferring the business assets may lead to the disclosure of hidden reserves, which is taxable. However, a tax-neutral transformation may be requested if certain conditions are met.

‍

VAT (Value Added Tax)

VAT aspects also need to be considered:

• The UID (company identification number) can potentially be retained.
• The VAT number can be transferred through the Swiss Federal Tax Administration (FTA).

‍

Practical Tips for a Smooth Transition

• Plan early: Legal and tax planning takes time.
• Adjust accounting: Consider the new VAT number, accounting structure and financial reporting obligations.
• Review contracts: Rental agreements, employment contracts or client agreements may need to be updated or re-signed.
• Communicate: Inform clients and business partners early about the legal structure change.

‍

Conclusion

Converting a sole proprietorship into an LLC brings many benefits, especially regarding liability limitation, professional structure and external perception. Two approaches are available: a formal legal transformation under the Merger Act or a more commonly used economic transformation via contribution in kind.

In both cases, careful planning and the involvement of legal and tax professionals are key to a successful transition.

‍

^{Transforming a sole proprietorship into a LLC}