Limited liability company (GmbH) VS Sole Proprietorship

A frequent question we are asked by clients considering starting their own business is which of the two to go for: a limited liability company (a GmbH in German, an Sarl, in French and Italian part of Switzerland) or a Sole Proprietorship, (an Einzelunternehmen in German, L'entreprise individuelle in French and Ditta individuale in Italian parts of Switzerland). 

So, to help our client make that decision, here is an easy-to-understand overview.

SOLE PROPRIETORSHIP

A Sole proprietorship is an ideal type of company form for business activities that are closely linked to the owner: such as architects, craftsmen, doctors, lawyers and local commercial businesses.The owner is the sole manager of the sole proprietorship. In a sole proprietorship, the owner does not need to be domiciled in Switzerland, but he or she must have a work permit and residence permit. Also sole traders are required to have more than 1 client, otherwise such a relation would be considered as employment.

Virtual office or shared office solutions might be a great choice for a business which does not have any need for an actual office everyday. That allows the company to create a professional image without making a significant investment in its own office space – no need to sign binding 5-year contracts, to set up office infrastructure, furnishings or take on utility costs. Moreover, transparent fixed costs and no hidden fees ensure accurate budgeting. Therefore companies and startups can register or expand their presence in prime business areas in Switzerland in the most cost-effective way.

LIMITED LIABILITY COMPANY (GMBH)

A GmbH is a private capital company set up by one or more natural persons or legal entitiesc. This type of company is ideal for any business focused on profit. It is mainly aimed at SMEs and family businesses. After the incorporation of the limited liability company the shareholder can register his/her employment.

Below is a comparison on the main characteristics of Sole proprietorship and a Limited Liability company.

	Sole proprietorship	Limited liability company (GmbH)
Capital	No capital required	Capital required of CHF 20'000
Establishment	- Simple establishment - Lower set up cost - Must have a Swiss work and residence permit - Must be registered with Swiss Commercial Trade registry when annual income exceeds CHF 100'000	- Must be registered with Swiss Commercial Trade registry - Must be incorporated by Notary authentification - Must have a Board of directors (of which one must be a Swiss resident)
Administration	If turnover is under CHF 500'000, simplified accounts to be kept	Yearly financial statements and tax return needs to be prepared and submitted to authorities. As well shareholder meetings need to be held to approve the financial statements.
Liability	The owner is liable with all private and business assets	The company's bedts are guaranteed only by the company assets / share capital
Business name	Limited to name of the owner and a description of the activity	Can be chosen freely (with "GmbH" or "Sàrl" at the end) subject to availability at the registry
Taxation	The owner of a sole proprietorship is liable for tax on all income and professional and personal assets. Tax Planning can be used whether the business and private home are at the same location or different locations. If the head office and private home are not at the same location, the owner will pay overall less tax.	Company is taxed on profits, capital, wealth (shareholders' holdings) and on the income forming part of the distribution of profits (dividends). Profits are always taxed at the company's registered office. The wages are always taxed at the recipient's place of residence. If the office space is not in the same municipality or canton as the owner's place of residence, this can lead to less or more taxes.
Social securities	Only the AHV (social security) registration and contributions are mendatory	AHV, ALV, UVG must be paid on the wages
Pension fund	In most cases, sole proprietorships do not have the option of taking out BVG, unless their professional association has a pension fund or if they have staff, in which case they can join the staff's pension fund. The sole trader, if he does not have a BVG, can pay 20% of his profit into pillar 3a, up to a maximum of CHF 34'416. All payments can be deducted from taxable income.	BCG registration and contributions are mandatory by employment. The owner of a GmbH can pay a maximum of CHF 6'883 into pillar 3a, but hass the option of making BVG purchases. All payments can be deducted from taxable income.

If you have doubts which legal form is more suitable for the registration of your business, please do not hesitate to contact us by email mail@ftrust.ch or call us on + 41 44 266 10 60 to book an appointment. We offer a completely free consultation to discuss your needs and find the best solution suited for your future business setup.