Founding a Company with Contributions in Kind

When incorporating a new company in Switzerland or converting a sole proprietorship into an AG or GmbH, it is possible to fulfil the capital requirements with contributions in kind instead of a cash deposit. This is useful for those with existing and useful assets but limited free capital. In this article, we explore the practicalities of this process. We explain what is meant by a contribution in kind and what types of assets qualify, how to value these assets, and the requirements and costs for establishing contributions in kind when incorporating a new company.  

Capital required when incorporating a GmbH or AG in Switzerland

When establishing a new company in Switzerland, there are certain requirements which must be met. One of these is fulfilling the minimum share capital requirement. For a GmbH, the minimum registered capital is CHF 20,000 (all of which must be paid up at the time of incorporation) and for an AG the capital requirement is CHF 100,000 (50% of which must be paid up).

The typical way of meeting these minimum capital requirements is by depositing the capital in the form of cash in a blocked account and submitting the proof of deposit from the bank. However, it is also possible to incorporate a GmbH or AG without depositing any actual money while still meeting the minimum capital requirements. This can be done through what is known as “contributions in kind”.

What is a contribution in kind?

A contribution in kind is a non-monetary contribution to a company with a measurable value in monetary terms. Instead of making a capital contribution in the form of cash, an individual or company can provide various assets such as equipment, supplies, real estate, vehicles, securities, intellectual property, etc. Each contribution in kind is attributed a monetary value according to certain valuation standards, and this value can be recorded as part of the capital contribution when founding a new company. The process of founding a company with contributions in kind is known as a “qualified formation”.

Criteria

For assets to be acceptable as contributions in kind for the purpose of a qualified formation, they must meet certain criteria:

1. Accountability: A contribution in kind must have a quantifiable value which can be recognised in the balance sheet of the company. This means that it must be possible to determine its economic value with relative accuracy, which will then be recorded as an asset in the company’s balance sheet.  
2. Transferability: For a contribution in kind to be recognised, it must be freely transferable. In other words, for the company to be able to obtain possession of the contribution in kind, it needs to be able to be transferred to the company’s assets when it is founded without legal or other obstacles.
3. Availability: The capital which is in the form of the contribution in kind must be readily available for the company. Once they have acquired ownership of the asset and entered into the commercial register, they must be able to dispose of it immediately and unconditionally. As such, assets that cannot be freely disposed of such as vehicle leases, rent deposit accounts, and so forth, cannot qualify as contributions in kind.
4. Usability: A contribution in kind must be “usable”. This implies that the company must be able to convert it into actual money in the event it is required to cover their outstanding liabilities (i.e., the capital acts as a liability substrate for creditors). As such, any asset which has a realisable market value satisfies this requirement.

What qualifies as a contribution in kind?

The following are examples of assets which qualify as contributions in kind:

• Real estate (e.g., land, buildings, etc.)
• Operational assets (e.g., equipment, furniture, vehicles, tools and machinery, inventory etc.)
• Shareholdings and securities (e.g., stocks in another company, bonds)
• Obligatory rights (e.g., definite claims against third parties)
• Intellectual property rights (e.g., copyrights, patents, trademarks)
• Assets and liabilities transferred from a sole proprietorship or general partnership

The following examples do not meet the aforementioned criteria and therefore do not qualify as contributions in kind:

• Future claims
• Rights of use without ownership (e.g., leases and rents of vehicles, property, etc.)
• Periodic services (e.g., transport and delivery contracts, the work performed by a founder)
• Highly personal rights (e.g., residential rights, undistributed inheritances)
• Low-value objects (e.g., basic office supplies)
• Assets already pledged (e.g., assets that are being used to secure a loan)
• Assets that cannot be freely disposed of and therefore do not meet the requirement of availability (e.g., vehicle leases, rental deposit account, etc.)

The process of establishing a company with contributions in kind

Founding a company by means of a qualified foundation (with contributions in kind) is similar to the process of founding a company with an ordinary cash contribution. However, there are a few additional documents and steps required:

Documents required for a qualified foundation

In addition to the basic requirements of company incorporation, the following documents must also be prepared when founding a company with contributions in kind:

1. Contribution in kind contract: the contribution in kind contract serves to legally transfer the asset in question to the newly founded company. Specific documents are needed for the valuation of different asset types, which we will outline in a later section.
2. Founding report: Along with other important details about the incorporation of the company, this report provides information about the type and condition of the contributions in kind and the appropriateness of their valuations (Art. 635 OR).
3. Audit report: An approved auditor must examine the founding report and provide a written confirmation that it is complete and correct (Art. 635a OR).

Steps for establishing contributions in kind

Establishing contributions in kind when founding a company involves the following additional steps:

1. Check the validity of non-cash contributions to be valued (i.e., do they satisfy the criteria for qualifying as contributions in kind?).
2. Evaluate the contributions in kind. For each type of asset there are certain documents which the auditor needs for the valuation process.
3. Complete the required documents. The documents must be pre-checked and approved by a qualified auditor, and thereafter notarised.

Once the above preliminary steps are complete, the additional contribution in kind documents can be submitted to the commercial register along with all other standard incorporation documents to complete the formal registration of the company. Note that if the foundation of the company is entirely through contributions in kind (i.e., no capital in the form of cash), there is no need for the deposit confirmation from a bank. This also eliminates the costs of setting up a blocked bank account for the capital contribution. However, if a combination of cash and contributions in kind is used, a confirmation of deposit is also required.

Valuation of contributions in kind

Once the auditor confirms that the asset contributed qualifies as a contribution in kind and can therefore be accounted for in the books of the business, they should also check that it has been valued correctly.

There are two valuation principles for determining the monetary value of a contribution in kind, which primarily differentiates between assets which are operationally necessary and those which are not required for operation (non-operational assets)

Operational assets: the valuation of assets that are necessary for the operation of the business is based on the proven purchase price of the asset after accounting for depreciation.  Examples include:

• Basic office furniture,
• Warehouses,
• Vehicles used for transport or delivery,
• Patents and licenses,
• Machinery and equipment,

Non-operational assets: Assets that are not needed for the operation of the business are valued at their estimated resale value. Examples include:

• Property not required for operation,
• Luxury office supplies (e.g., coffee machine, microwave, etc.)
• Backup machines

Documents required for the evaluation of assets

The auditor requires the following documents to check the valuation of each type of contribution in kind:

Vehicles:

• Eurotax rating
• Copy of vehicle registration document
• Photo of the vehicle with license plate
• Photo of the odometer with current total mileage
• Note that a leased vehicle cannot be used as a contribution in kind

Operational assets such as furniture, tools, equipment, and inventory:

• Detailed list of items contributed (name of item, quantity, value)
• Photos of each individual item,
• Purchase invoices or expert reports on the value (only required if the value cannot be determined from other reliable sources),
• Evidence of payment.

Licenses, patents, and other intellectual property:

• Valuation report,
• Detailed list of the expenses incurred in acquiring the rights,
• Documentation outlining the measurable benefits of the IP over the medium- to long-term (several years),
• Patent or license documents (application, registration, receipt of fee payment, etc.).

Self-developed software and software licenses:

• Description of the software along with operating instructions,
• Detailed list of the number of development hours if self-developed,
• Associated hourly rate for development including documents to justify it,
• The auditor should be able to test the functionality of the software.

Costs of establishing contributions in kind

The main costs associated with founding a company through contributions in kind are for the audits for the valuations of the specific contributions. The cost of the audit depends largely on the type of deposit, its complexity, value, and number of individual items contributed. A simple contribution in kind audit costs approximately CHF 500 while more complex audits of an entire inventory or financial statement can come to CHF 1,500 or CHF 2,000 in very difficult cases. Other costs include expert and legal advice, administering the qualified foundation process, along with the ordinary costs of incorporating and registering a new company.

Converting a sole proprietorship/general partnership into a GmbH or AG

One area where qualified foundations frequently occur is when a sole proprietorship or partnership is converted into a legal entity such as GmbH or AG. Such conversions represent special cases which are almost always treated as contributions in kind.

When a sole proprietorship is converted into a corporate entity, the assets and liabilities from the previous company (sole proprietorship) are taken over by the newly founded corporation (AG) or limited liability company (GmbH), and the old company is then dissolved. This transfer represents a contribution in kind, and for such a qualified foundation to be possible, there must be a surplus of assets belonging to the sole proprietorship.

In such cases, the surplus assets of the sole proprietorship are determined by calculating the difference between total assets and liabilities. If the surplus meets the minimum capital requirements (CHF 20,000 for a GmbH or CHF 100,000 for an AG), it is possible to incorporate the new company entirely with contributions in kind, and all assets and liabilities are transferred. If the asset surplus is insufficient, the founders of the company must deposit the additional cash value in a blocked capital payment account.

An audit is required to assess the profitability of the company and confirm that the asset surplus is sufficient for the qualified foundation.

Documents required

To transfer assets from a sole proprietorship to a newly founded GmbH or AG, the following documents are required:

• Founding report
• Asset transfer agreement
• Annual financial statement or interim financial statement (takeover balance sheet) if the annual financial statements are older than six months at the time of conversion).
• Account statements at the takeover date
• Bank account balance
• Statutes of the new company
• Records of outstanding debts and receivables at the date of takeover (creditors and debtors lost)
• Audit confirmation from a qualified auditor

When is the best time to convert a company?

The optimal time to convert a sole proprietorship or partnership into a GmbH or AG is on January 1^st of each year. This simplifies the process in that the many of the required documents (such as the takeover balance sheet and inventory list) would have already been prepared as part of the annual financial statements. Fortunately, it is also possible to convert retrospectively as of January 1^st provided it is completed by end of June (within 6 months) of the current financial year. Thereafter, retrospective conversions are no longer possible.