Comparison of legal forms: How to make the right choice for your company

Choosing the right legal form for your company when starting a new business or working as a self-employed individual is crucial. The choice of legal form depends on various factors, such as liability, start-up capital required, decision-making power, and taxes to be paid. Choosing the right form is not always that straightforward, so we assist by presenting the most important legal forms and comparing their advantages and disadvantages.

What is meant by “legal form”?

The legal form of a company refers to its specific legal structure as a corporate entity and hence determines the regulatory framework that applies to it. When forming a new business, there are numerous legal forms that it can take, the choice of which will depend on various factors. Common examples include sole proprietorship, limited liability company, and corporation.

The legal form of a company has many consequences, including the operational and managerial structure, the accounting and tax regulations which apply, and many other legal and personal implications related to liability, privacy, risk, costs, etc. Choosing the right legal form for your company is therefore essential to ensure its success and longevity.  

Do you always need a legal form as an entrepreneur?

The simple answer to this question is that you will always have a legal form if you are an entrepreneur running your own business. In some cases, the nature of your business may require you to specifically incorporate a separate legal entity, or you may choose to do so for the additional benefits it can provide. Yet, even if you do not incorporate a legal entity for your business, it is classified as a sole proprietorship by default. This is not a distinct legal entity from the owner yet is still seen as a type of “legal form” of a business.

Overview of the main legal forms in Switzerland

Here, we provide an overview of the most popular legal forms of businesses in Switzerland. We provide a more in-depth analysis of the first three legal forms, which include the sole proprietorship, limited liability company (GmbH), and stock corporation (AG), as these are the most common choices. We also provide a brief overview of some other types of legal forms commonly used in Switzerland.

Sole proprietorship

The sole proprietorship is the most popular type of legal form in Switzerland due to its simplicity and lack of incorporation requirements. It is also the default legal form for anyone operating their own business who does not specifically incorporate one of the other legal entities listed below. A sole proprietorship can only be founded by a natural person and is legally inseparable from the owner. It has a single owner who is known as a “sole proprietor”.

Sole proprietorships can be further classified depending on whether they are registered and have a duty to keep accounts or not, which in turn depends largely on annual turnover. Specifically, sole proprietorships with an annual turnover of CHF 100,000 or more are required to enter into the commercial register and maintain accounts. Those with an annual turnover of more than CHF 500,000 are required to use double-entry accounting.

Advantages of a sole proprietorship

• No minimum share capital requirements.
• No formal incorporation process is required as the sole proprietorship is not a separate legal entity.
• Low administration effort and no special administrative formalities.
• Avoids double taxation because tax is entirely on a “pass-through” basis whereby the owner is liable for the taxes in their own personal capacity.
• Entry into the commercial register is only required if the annual turnover exceeds CHF 100,000.
• Double-entry bookkeeping is only required for sole proprietorships with an annual turnover of more than CHF 500,000.

Disadvantages of a sole proprietorship

• Unlimited liability: the primary downside of a sole proprietorship is that the owner has unlimited liability for the debts and obligations of the company. As the company does not exist as a separate legal entity, it cannot be sued in its own name, which makes the owner entirely responsible for any claims against the business in his/her personal capacity.
  

• Transfer of ownership is complex because the business does not exist as a standalone entity.
• The company cannot be converted into a GmbH or AG without first being liquidated.
• It is more difficult to obtain credit compared to limited liability companies and corporations.
• The company name cannot be chosen freely and must contain the surname of the founder with or without the first name. In addition, name protection is geographically limited.

Limited liability company (GmbH)

The GmbH is an extremely popular and versatile legal form for small and medium-sized enterprises, as well as family businesses, in Switzerland. It is the third-most common type of company form in Switzerland after the sole proprietorship and stock corporation.

A GmbH is its own legal personality and is incorporated by one or more people who join to form the company. The owners may be either natural persons or corporate entities. Members of a GmbH are only liable for company obligations up to the amount they have invested.

Advantages of a GmbH

• Limited liability protection: the main advantage of a GmbH is that it offers limited liability protection to its owners, unlike a sole proprietorship. This means that members are not held personally liable for company debt and therefore never stand to lose more than they have invested in the company.
• Low share capital requirements of only CHF 20,000. This is a significant increase from the zero capital requirement of a sole proprietorship but is still relatively low compared to other types of entities such as a corporation which requires a share capital of CHF 100,000 (of which CHF 50,000 must be paid up).
• Only one or more owner is required, who may be any natural or corporate entity.
• The company name may be freely chosen as long as it includes the abbreviation ‘GmbH’ and adheres to other naming requirements, such as being unique and not offensive.
• A GmbH can be readily converted into a stock corporation (AG) without needing to first be liquidated. This allows for easier expansion when the company operations grow and develop, and better flexibility down the line.
• Owners of a GmbH do not have to pay tax on a gain from the sale of their ordinary shares – unless the transaction meets the criteria of a direct or indirect partial liquidation or a transposition.

Disadvantages of a GmbH

While a GmbH is seen as a relatively simple type of legal entity, the administrative requirements for incorporating are significantly more extensive than a sole proprietorship:

• All GmbHs are required to enter into the commercial register and must have an incorporation deed that is publicly authenticated by a notary.
• A GmbH must draft articles of incorporation outlining the proposed business activities and containing various information like the names and duties of members.
• An annual general meeting must be held between members.
• In some cases, there may be an obligation to conduct an audit in which case an external auditor must be commissioned.
• The incorporation and startup costs are lower than for a stock corporation but significantly higher than a sole proprietorship which may make a GmbH less attractive to small business owners and self-employed individuals.
• There is double taxation in that profits are first taxed at the corporate level and may then be taxed again at the personal level when they are distributed to the GmbH members.
• The managing directors of a GmbH have no right to unemployment benefits in Switzerland as long as they officially hold their role in the company. They will only become eligible if the company is liquidated or they give up their post.
• There is less privacy compared to an AG, and the names of the owners are publicly identifiable along with the company.

Stock corporation (AG)

Like a GmbH, a joint-stock company (AG) is a separate legal entity that can be founded by one or more natural or legal persons. The public limited company is the most frequently chosen legal form among corporations in Switzerland. It is usually chosen by companies with higher capital requirements and is suitable for almost all types of profit-oriented businesses.

As a distinct corporate entity, an AG offers limited liability protection to its owners (known as shareholders). In the case of public limited companies, the shares may be publicly tradable on the stock exchange, which then gives a public limited company much greater scope to expand its operations through public capital raising. Its size and scope does, however, come with some downsides. It is the most complex and expensive of all the legal forms mentioned so far and has the strictest regulatory and reporting requirements to adhere to.

Advantages of an AG

• Access to capital: one of the main advantages of an AG is that it provides access to capital in that shares can be issued to the public and are easily tradable.

• An AG is a separate legal entity which therefore provides limited liability protection to its shareholders. A shareholder is only liable to the amount which they have invested in the company (i.e., the shares which they own).
• It is easier to raise capital in the form of loans, as public limited companies are considered to be the most reputable and creditworthy of the various legal forms mentioned.
• A stock corporation provides much greater levels of privacy as anonymous ownership of shares is possible.
• The company name can be chosen freely.
• Owners of a corporation do not have to pay tax on a gain from the sale of their shares – unless the transaction meets the criteria of a direct or indirect partial liquidation or a transposition.

Disadvantages of an AG

• An AG has the most onerous capital requirement of CHF 100,000, of which at least half must be paid up when incorporating.
• The incorporation and administration formalities are even more extensive than a GmbH.
• There are stricter accounting requirements applied to an AG. Publicly listed stock corporations are required to adhere to Swiss GAAP or another suitable accounting standing (e.g., IFRS).
• There is double taxation in that profits are first taxed at the corporate level and then again at the personal level when they are distributed to the AG shareholders in the form of dividends, or capital gains when they sell their shares.
• There are strict regulations regarding the formation of legal reserves, measures in the event of over-indebtedness, etc.
• The managing directors and all persons who exercise a considerable influence on the decisions of the company are not entitled to unemployment benefits in the case of an AG in Switzerland if they officially hold their position in the company. They are only entitled if the company is liquidated, or they give up their office.

Other legal forms

The three aforementioned legal forms are the most common business entities in Switzerland. Some other well-known options include:

• General partnership (KIG): A KIG is very similar to a sole proprietorship except with more than one owner. Owners are entirely liable for the obligations of the partnership.
• Limited partnership (KmG): A KmG is a partnership with at least one general partner who is fully liable for the debts of the business and one or more limited partners who are only liable up to the amount they have invested in the partnership. This form is less relevant in the Swiss market.
• Foundation: A foundation is a legal entity into which assets are transferred for a specific purpose, often non-profit. It is established with a notarial deed or will, and may enjoy certain tax benefits and exemptions.
• Association: An association is a legal entity that is easy to form and requires no minimum capital. It is not itself a corporate entity yet can run a commercial business in its name, in which case it must be entered into the commercial register.  
• Cooperative (Gen): A cooperative is a type of society with a focus on economic self-help and promotion. It requires at least seven people to set up and there must be at least three members forming the administration. Entry in the commercial register is mandatory. The name of the cooperative can be freely chosen and must include the suffix “cooperative”.