Your sole proprietorship is doing well, turnover is growing, and you are starting to wonder whether a GmbH might be the better choice. It offers less personal risk, potential tax advantages above a certain profit level and a more professional image with customers and business partners. This guide explains when switching makes sense, how the conversion works from a legal perspective, what it costs and what you need to consider regarding taxes and accounting.
When does switching from a sole proprietorship to a GmbH make sense?
A sole proprietorship is ideal when starting out because it is simple, inexpensive and flexible. But beyond a certain point, the balance changes and a GmbH becomes the better choice. The most common reasons for switching are:
- Your annual profit consistently exceeds approximately CHF 100,000 to CHF 150,000. Above this threshold, a GmbH's salary and dividend split can generate noticeable tax savings because your entire income is no longer subject to progressive income tax.
- You want to protect your personal assets. As the owner of a sole proprietorship, you have unlimited personal liability. With a GmbH, liability is generally limited to the company's assets under Art. 794 CO.
- You want to bring in partners or investors. A sole proprietorship has no shareholders, whereas a GmbH does.
- You need a more professional image. A company name that does not include your surname, nationwide name protection and entry in the commercial register as a corporation can inspire greater confidence among business partners and banks.
You can find a detailed comparison of the two legal forms, including liability, taxes, costs and social insurance, in our comparison of sole proprietorships and GmbHs.
How does the conversion work legally?
The short answer is that a sole proprietorship cannot technically be "converted" in Switzerland. There is no switch you can simply flip. What actually takes place is a transfer of assets under Arts. 69 et seq. of the Merger Act (MerA): you establish a new GmbH, transfer the assets and liabilities of your sole proprietorship to the GmbH as a contribution in kind and then delete the sole proprietorship from the commercial register.
The advantage of this route is that the transfer takes place through what is known as partial universal succession. This means that contracts, employment relationships and liabilities are transferred to the new GmbH as a whole, without every individual contractual partner having to consent under Art. 73 para. 2 MerA.
Your sole proprietorship must be entered in the commercial register for this process to be available. If it is not yet registered, for example because your turnover is below CHF 100,000, you must complete the registration before transferring the assets under the Merger Act.
The process step by step
1. Choose the right time
The ideal time is the end of your financial year. This allows your annual financial statements to serve directly as the takeover balance sheet, avoiding the need for separate interim financial statements. If you establish the GmbH by the end of June, the transfer can be backdated to 1 January of the same year. From July onwards, backdating it to the start of the year is no longer possible.
2. Prepare a takeover balance sheet
You need an up-to-date balance sheet for your sole proprietorship listing all assets and liabilities. For a transfer of assets, the balance sheet may be no more than six months old when the documents are received by the commercial register office. This balance sheet becomes part of the transfer agreement.
3. Establish the GmbH and make a contribution in kind
You establish the GmbH through the usual process involving articles of association, a notary and entry in the commercial register. The difference is that the minimum share capital of CHF 20,000 is not paid in cash but contributed in kind from the assets of your sole proprietorship. A licensed auditor must confirm the contribution in kind in an audit report, consisting of the founders' report and audit confirmation under Art. 777c CO.
You can find the complete incorporation process, including a checklist, in our guide to setting up a GmbH.
4. Prepare the transfer agreement and update the commercial register
The transfer agreement, including the inventory, specifies which assets and liabilities are transferred from the sole proprietorship to the GmbH. It is submitted to the commercial register office. The transfer of assets becomes legally effective when it is entered in the commercial register. The sole proprietorship can then be deleted from the register.
5. Apply the VAT notification procedure
If your sole proprietorship is subject to VAT, you can use the notification procedure under Art. 38 para. 1 of the VAT Act when transferring it to the GmbH. This means that no VAT is charged on the transferred assets, provided that the GmbH continues to be liable for VAT.
Taxes during the conversion: the five-year blocking period
The conversion can be tax-neutral, but only if three conditions are met:
- Tax liability continues in Switzerland, meaning the GmbH has its registered office in Switzerland.
- The existing book values are retained for income tax purposes. Hidden reserves therefore remain in the accounts and are not released.
- You do not sell your shares in the GmbH during a five-year blocking period under Art. 19 para. 2 of the Federal Direct Tax Act (FDTA).
If all three conditions are met, no income tax is due on the transfer. If you sell the shares during the blocking period, the hidden reserves are taxed retroactively as if you were still the owner of the sole proprietorship at the time of the sale.
There is another point to consider: if you retain individual assets during the transfer and they no longer serve a business purpose, they are classified as private assets. Income tax and social security contributions are then due on the hidden reserves attached to those assets.
The tax consequences depend heavily on your specific situation. Discuss them with a fiduciary at an early stage before starting the process.
How much does the conversion cost?
The costs consist of establishing the GmbH and completing the asset transfer procedure:
- Notary fees for the deed of incorporation and transfer agreement: CHF 1,500 to CHF 3,500
- Commercial register fees for entering the GmbH and deleting the sole proprietorship: approximately CHF 600 to CHF 800
- Auditor's report for the contribution in kind: CHF 500 to CHF 1,500
- Fiduciary advice for the takeover balance sheet and tax planning: CHF 500 to CHF 2,000
You should expect total costs of CHF 3,000 to CHF 6,000, excluding the CHF 20,000 share capital. The share capital remains available to the GmbH as working capital and is not a lost expense. Costs vary by canton, particularly notary fees.
Checklist: converting a sole proprietorship into a GmbH
- Reviewed profit and tax situation to determine whether the switch makes sense
- Chosen the timing, ideally at the end of the financial year
- Ensured the sole proprietorship is entered in the commercial register, as required for a transfer under the Merger Act
- Prepared the takeover balance sheet, no more than six months old
- Consulted a fiduciary or tax adviser regarding the tax consequences and blocking period
- Established the GmbH with a contribution in kind, including the notarial deed, auditor's report and commercial register entry
- Prepared and submitted the transfer agreement and inventory
- Applied for the VAT notification procedure if subject to VAT
- Deleted the sole proprietorship from the commercial register
- Switched the accounting system to double-entry bookkeeping
Accounting after the conversion
From the moment the GmbH is entered in the commercial register, you are operating as a corporation and must keep double-entry accounts under Art. 957 para. 1 CO. If you previously used simple income and expenditure accounting, the change can feel like jumping in at the deep end.
With Infinity, the transition is much smoother. Infinity is Switzerland's AI accounting software, developed to take most manual work off your hands. Live Accounting connects your bank account and suggests entries in real time. Live Capture recognises documents and receipts from a photo and automatically extracts the relevant data. With Instant Fill, you can create quotes and invoices without completing every field manually. You work with a modern interface rather than a traditional accounting screen, while double-entry bookkeeping runs in the background without requiring your attention. If you already used Infinity as a sole proprietorship, you are familiar with the system and do not need to start from scratch.
Further information
The legal basis for the transfer of assets is set out in the Merger Act, Arts. 69 et seq.. The tax requirements for a tax-neutral transfer are governed by Art. 19 paras. 1 and 2 FDTA. Our guide to legal forms provides a detailed overview of all legal forms.
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