If your sole proprietorship is running well, you may eventually ask yourself the question about converting your company into a GmbH or AG. We show you when it makes sense to do so and what you should bear in mind. And using a practical example, you learn which tax hazards to avoid.
Maybe your experience mirrors that of many other founders of small companies: You founded a sole proprietorship a couple of years ago and mastered the initial challenges. Now your company is doing well, and your business is in the process of growing steadily and establishing itself more and more on the market. But soon you reach the limits faced by companies that have sole proprietorship as their legal form. Maybe because you are receiving increasingly large orders and don’t want to be held liable with your personal wealth. Or because you want to take on a business partner or staff.
The question about the possibility of converting into a GmbH or AG arises. We take a look at when a conversion is possible and who can benefit from this step.
Did you know? We can also support you in legal matters. For individual advice regarding the subject of converting a sole proprietorship into a GmbH or AG, owners of small and micro-sized companies can take advantage of five hours of legal advice free of charge as part of our commercial legal protection insurance.
If you have been successful for several years operating as a sole proprietor, a GmbH or AG may seem to be the next logical step.
Nevertheless, you must ask yourself: Is the conversion really worth it? And what is the right legal form for me? We explain six differences between sole proprietorships and a GmbH or AG – and which advantages they would have for you.
Unlike sole proprietorships, you as the business owner of a GmbH or AG are, as a rule, only liable for business losses with the capital that was paid in when the company was founded (GmbH: At lease CHF 20,000; AG: At least CHF 100,000) and not with your total personal wealth. However, with a GmbH, in particular, there are exceptions: In cases of breaches of obligations or regulations, for example, you can also be held liable with your personal wealth.
How you benefit: A GmbH or AG entails a significantly lower financial risk for you as a private individual and thus also for your loved ones.
Unlike a sole proprietorship, a GmbH or AG is its own taxable entity. That means that the realized gains are reported separately, and not included in the private tax declaration or taxed together with any other income.
How you benefit: When it comes to the tax declaration and admin work, you have a clear separation between private finances and business finances.
If you own a GmbH or AG, your income is not the net profit of the company like with a sole proprietorship. Instead, you pay yourself a salary (GmbH and AG) and can also pay yourself a dividend (AG). As the owner of the company, you decide the amount of salary and dividends – although they must be in a range common for the market and industry.
How you benefit: As your salary stays the same, you benefit from greater stability and planning security in your private life.
Pension fund solutions are voluntary for sole proprietorships. This is not the case for a GmbH or AG. You must always have a pension fund solution for employees – and thus for yourself as well.
How you benefit: After choosing the right pension fund solution, you don’t have to consider or calculate much more, rather you almost “automatically” prepare for later. And a pension fund solution can have tax advantages.
Incidentally, as a self-employed person (sole proprietorship), you can join a pension fund through solutions offered by professional associations, for example. If you do not do so, you can in turn take advantage of a higher possible deposit amount for pillar 3a (“large pillar 3a”). Here, it is important to thoroughly understand the subject and calculate carefully. If you need support , it’s best to seek advice from a specialist.
In a GmbH, it is relatively easy to bring a partner on board. If you found an AG, you may already be looking forward to having your first shareholders.
Your advantage: The foundation for the further growth of your company is set. Now you can distribute tasks and responsibility among several business partners and quickly raise new capital for the company.
Unlike a sole proprietorship, the company name of a GmbH or AG does not necessarily have to include your family name (it only has to have the suffix “AG” or “GmbH”).
Your advantage: You have much more flexibility when choosing the name of your company and thus position yourself better on the market as well. Moreover, a “GmbH” or “AG” generally makes a more professional impression among customers.
In brief: No, technically a sole proprietorship cannot simply be converted into a GmbH or AG.
However, even if it is not officially called a “conversion,” there are in fact options to turn a sole proprietorship into a GmbH or AG.
Contributions in kind play a role if a sole proprietorship is to become a GmbH or AG through the Mergers Act (i.e. the sole proprietorship is to be merged with a GmbH or AG): You transfer the assets (or parts thereof) of the sole proprietorship to the GmbH or AG – with all equity and liabilities.
The contributions in kind make sense if your sole proprietorship already generates a substantial profit and has numerous contracts with partners, suppliers, etc. Since these contracts are transferred to the GmbH or AG, they do not have to be renegotiated or signed again.
The assignment of assets in accordance with the Mergers Act, or contributions in kind, is only possible for sole proprietorships that are entered in the Commercial Register. This doesn’t apply to your sole proprietorship? Then the transfer of assets is a bit more complicated. Instead of a complete transfer, the contracts with third parties in this case must be transferred individually (individual succession).
The alternative to contributions in kind is what is referred to as acquisition of assets. To do so, you apply for the deletion of the sole proprietorship and found a new GmbH or AG. The new company buys the assets of the former sole proprietorship.
Contributions in kind or acquisition of assets: The costs usually range between CHF 2,000 and CHF 5,000 – if the founding is complicated, it can even be more.
You see, the step of converting into a GmbH or AG must be carefully thought out and planned. Professional advice can help make this step easier. We would be glad to help.
Now you have an overview of the advantages of converting a sole proprietorship into a GmbH or AG and which options you have. Have you made your decision? If so, you now have to take care of implementation.
Step 1: Firstly, you need to take inventory of all the assets to be transferred. The following points should be borne in mind:
To take inventory, the “normal” annual financial statements (as a rule as an excel or PDF document) of your sole proprietorship – provided they are not more than six months old. For this reason, we recommend completing the transfer at the turn of the year or by the end of June at the latest. Otherwise, you will have to create an extra balance sheet, the so-called takeover balance sheet.
Step 2: As owner of a sole proprietorship, you next need to conclude an Asset Acquisition Agreement with the company (legal entity) that you newly found. In other words, your sole proprietorship makes all assets listed in the inventory available to the new GmbH or AG. In return, you receive common stock of the GmbH or AG.
In the case of contributions in kind, the process is the same: By means of an agreement on contributions in kind , property, receivables, and/or other assets are deposited with the new company. In return, you as the depositor receive shares in the company.
Note: An addition cost is incurred if land is also transferred (e.g. company premises). In such cases, a notary has to officially certify the agreement on contributions in kind or the asset acquisition agreement.
Incidentally, if you want to make a contribution in kind, this will be published in the Commercial Register and the Swiss Commercial Gazette (SCG).
Our tip regarding agreements governing contributions in kind or acquisition of assets: You can save valuable time by using templates. You can obtain these from the responsible cantonal offices or from myright.ch.
Step 3: As the founder of the new GmbH or AG, you then have to document the contribution in kind or acquisition of assets in a foundation report . In particular, this includes:
A fiduciary expert can help you draft the report and a qualified auditor can review (obligatory) the completeness and correctness of the foundation report.
Step 4: Your new GmbH or AG now only needs articles of incorporation, i.e. the fundamental rules according to which your company operates. These must fulfill certain regulations. You can find a sample document (German) on the SME portal of the federal government.
Depending on how your company is set up, additional documents may be required before you can enter it in the Commercial Register: From deeds and account statements to details about outstanding receivables. Compile all the documents in (digital) folders, that way you won’t lose an overview.
It’s best to get professional support, for example from your fiduciary expert or in the form of legal advice as provided within the scope of commercial legal protection insurance.
Step 5: Last but not least, you need to apply with the Commercial Registry for entry of the new company and deletion of the sole proprietorship.
Important information: You need the certificate of incorporation, the new articles of incorporation, and any other relevant documents (see step 4).
Remember that in addition to other offices, you need to notify social insurances and your business partners about the change to your business activity.
Voilà, you converted your sole proprietorship into a GmbH or AG!
But be careful: The new legal form also entails new obligations and requirements. That’s why it’s a good time to review the insurance status of your company.
No, converting a sole proprietorship into a GmbH or AG does not incur an additional tax liability, provided:
Is your sole proprietorship subject to value-added tax? If so, the conversion is subject to a reporting process. This is so that the acquiring company does not have to pay value-added tax on the contributions in kind or acquisition of assets.
Please note: If you have withdrawn vested benefits to become self-employed, but have founded a GmbH shortly thereafter, taxes may be owed.
A. K., Zurich: I opened up my own nail studio last year. I had my vested benefits paid out in cash to make the necessary investments in my business. After a successful start, I founded a GmbH for my nail studio four months later to reduce my liability risks. Now I received a letter from the tax office saying that I must repay the withdrawn vested benefits to the vested benefits foundation within 30 days because I allegedly am no longer self-employed. The letter also included a warning that if I do not repay the cash payout, the amount will be added to my other taxable income. I don’t understand – am I not still self-employed as the owner of my GmbH? Moreover, I don’t know whether the vested benefits foundation would even take back the vested benefits. What do you recommend?
Ursula Wiedmer, Legal Services AXA: According to Art. 5 para. 1 (b) of the Vested Benefits Act, the cash payout of vested benefits is only possible if an employee is no longer deemed to be an employee within the meaning of the BVG after taking up self-employment. Whoever is an employee complies with the practice for AHV when it comes to occupational benefits. The requirements for a cash payout were met at the beginning because you gave up your fixed employment and became self-employed with your nail studio (sole proprietorship). Since you now exercise your activity within the scope of a GmbH, however, this is no longer the case in line with AHV practice: You are employed by your GmbH and receive a salary subject to AHV as an employee. With your AHV salary being more than CHF 22,050, you are required to have occupational benefits insurance. The tax assessment of the cash payout depends on whether the tax subject has taken up self-employment. If the cash payout and the founding of a GmbH/AG are close together in terms of time, the tax authorities take the stance that no self-employment was taken up (BGE 2C_156/2010 v. 7.06.2011 Erw. 4.3). In such a case, the cash payout was not legal from the view of the tax authorities, which has extremely unpleasant tax consequences, as you have recently experienced. We recommend contacting the vested benefits foundation: The foundation will allow the repayment of the cash payout provided you can submit the letter of the tax office, which the foundation will request. For other start-ups, we recommend waiting at least three tax periods after a cash payout before considering converting a sole proprietorship into another legal form.
The example of A. K. in Zurich clearly shows that there are many things to keep in mind when converting a sole proprietorship into a GmbH or AG. It is very important to assess your case individually. For this reason, consult an expert from the beginning, for example for legal advice or from your fiduciary expert.