Sole Proprietorship or LLC? – A Comparison Regarding Liability, Taxes, and Administrative Effort

Anyone looking to start a business in Switzerland often faces the question: Sole proprietorship or LLC?

Both legal forms have their strengths and weaknesses.

This article highlights the main differences, focusing on liability, taxes, and administrative effort – three crucial criteria for new founders.

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Liability – Personal vs. Limited Responsibility

Sole Proprietorship

Liability is one of the biggest differences between the two legal forms.

In a sole proprietorship, the owner has unlimited personal liability, meaning private assets – including savings and personal property – can be seized to cover debts.

Advantages:

• No minimum capital required
• Low formation costs, as no notarization is required

Disadvantages:

• High financial risk for the owner

Limited Liability Company (LLC)

As the name suggests, the LLC provides limited liability.

Shareholders are generally only liable up to the contributed share capital (minimum CHF 20,000).

Advantages:

• Private assets are protected
• Greater credibility with business partners due to required capital contribution

Disadvantages:

• CHF 20,000 must be available at the time of incorporation
• Higher setup costs because notarization is required

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Taxes – Differences in Income and Profit Taxation

Sole Proprietorship

A sole proprietorship is not a separate taxable entity.

No separate tax return is filed for the business.

Company profits are added directly to the owner’s personal income and taxed at progressive income tax rates.

Key points:

• OASI/DI/IPG social security contributions are based on business profits, as profit counts as income
• Business losses may be offset against other personal income

LLC

An LLC is a legal entity and must file its own corporate tax return.

This creates two levels of taxation:

1. The LLC pays profit taxes
2. Shareholders pay income tax on salaries and taxes on dividends distributed

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Administrative Effort

Sole Proprietorship

This is the simplest form of self-employment.

A commercial register entry is only mandatory once annual revenue exceeds CHF 100,000.

Bookkeeping requirements are low:

• A simple bookkeeping system is sufficient
• Double-entry accounting is only required when annual revenue exceeds CHF 500,000

LLC

The LLC comes with more formalities.

• Entry in the commercial register is mandatory
• Share capital must be deposited into a blocked bank account before incorporation

Bookkeeping obligations include:

• Mandatory double-entry accounting
• Obligation to prepare annual financial statements

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Conclusion – Which Legal Form is Right?

The decision between a sole proprietorship and an LLC depends on your priorities:

| Priority                              | Recommended Legal Form |
| ------------------------------------- | ---------------------- |
| Minimize liability                    | → LLC                  |
| Low setup costs and simplicity        | → Sole proprietorship  |
| Growth plans, investors, or employees | → LLC                  |
| Flexibility and quick start           | → Sole proprietorship  |

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Many entrepreneurs start as a sole proprietorship and later convert to an LLC once revenue and risks increase.

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