Transforming a sole proprietorship into a limited company: why and how?

The initial dilemma for entrepreneurs

In a previous article, we discussed the choice faced by many Swiss entrepreneurs when launching their business: should they start as a sole proprietorship or set up a limited company straight away, such as a GmbH or AG? Many opt for the sole proprietorship, attracted by its simplicity and flexibility. However, this legal structure can quickly reveal its limits, particularly as the business grows.

In practice, we find that several factors motivate self-employed individuals to consider a transformation: the growth of their business, the need to better protect their personal assets, the arrival of partners or investors, or the search for a more suitable tax framework.

Transforming a sole proprietorship into a limited company can be done in two ways. The first involves transferring the existing assets and liabilities to a new or existing company by means of a contribution in kind. The entrepreneur then receives shares or equity in return. This process requires several steps: preparing recent financial statements (no older than six months), establishing an inventory of assets and liabilities, drafting a transfer agreement in line with the Merger Act, producing a foundation report (with the decision to transfer assets formalised by a notarial deed), and obtaining certification from a licensed auditor. If employees are on the payroll, their contracts are automatically transferred to the new company, in accordance with Article 333 of the Swiss Code of Obligations.

The second method is to set up a new company through a cash contribution, then transfer or sell the sole proprietorship’s assets to it. This is usually formalised by a sales or transfer agreement. This approach is more flexible: it allows for the selection of which assets to transfer, the possibility of leaving behind problematic debts (subject to creditors’ rights), and it is less administratively burdensome depending on the assets involved, especially since no audit report is required if only cash is contributed.

That said, this method also has drawbacks. It may trigger the immediate taxation of latent capital gains if the assets are sold at above book value. In addition, existing contracts (leases, suppliers, insurance, etc.) must be renegotiated or terminated, as nothing is transferred automatically. Finally, there is often a need for double administrative management during the transition phase, particularly with regard to VAT and tax returns.

In general, a contribution in kind is preferred. It allows for immediate continuity of the business, contracts and employment relationships. It also makes it possible to benefit from tax neutrality, provided that certain conditions are met: the acquiring company must remain subject to Swiss tax, book values must be carried over without revaluation, the transferred activity must constitute a business or a distinct part of one, and the shares or equity received must not be resold within five years of the transformation.

We will return in a future article to the tax implications of this operation. The choice between the two methods depends on many factors. It is therefore strongly recommended to seek guidance from a tax advisor and a restructuring specialist in order to make the best decision.

Our wealth planning experts are at your disposal to support you in this transition.