LLC or sole proprietorship: Which legal form is right?

What is the most important difference between LLC and sole proprietorship?

The most important difference is liability.

In the case of an LLC, fundamentally only the corporate assets are liable. This is explicitly stated in the law: The limited liability company is a personal capital company, and only the corporate assets are liable for its obligations (Art. 772 Abs. 1 OR). Additionally, the law states that only the corporate assets are liable for the obligations of the company (Art. 794 OR).

This is different for a sole proprietorship. As the owner, you are not shielded behind a separate legal entity. The business is closely linked to you as a natural person. Therefore, the company name of a sole proprietorship must also contain your family name (Art. 945 Abs. 1 OR).

In practical terms, this means: If you conclude contracts as a sole proprietorship, if claims remain unpaid or if claims for damages arise, your private assets can be more heavily affected. In the case of an LLC, this risk is fundamentally limited to the corporate assets. However, this is not limitless. Anyone who acts wrongly personally, provides guarantees, or violates duties can still be held personally responsible under certain circumstances.

When does a sole proprietorship make sense?

A sole proprietorship makes sense if you want to start simply, have low fixed costs, and initially want to keep your business manageable.

Typical cases are:

• Consulting, coaching, or creative services with a low liability risk

• Secondary occupation or test phase of a business idea

• small activities without major investments

• Business models without employees and without high contract risks

The great advantage lies in the uncomplicated start. No minimum capital is required for a sole proprietorship. In addition, registration in the commercial register is not always mandatory immediately. A natural person who runs a business only has to register their sole proprietorship if sales revenue of at least CHF 100'000 was achieved in the last financial year (Art. 931 Abs. 1 OR). Anyone below this can register voluntarily (Art. 931 Abs. 3 OR).

Accounting is also simpler for smaller sole proprietorships. Sole proprietorships with sales revenue of less than CHF 500'000 only need to keep records of income and expenses as well as the asset situation (Art. 957 Abs. 2 Ziff. 1 OR). From sales revenues of CHF 500'000, stricter bookkeeping and accounting requirements apply (Art. 957 Abs. 1 Ziff. 1 OR).

The disadvantage: Simple does not mean risk-free. If your business grows, accepts larger orders, or enters into financial obligations, personal liability can become the crucial weak point.

When does an LLC make more sense?

An LLC makes more sense if you want to limit liability risks, present yourself more professionally, or structure your business more systematically in the long term.

An LLC requires a share capital of at least CHF 20'000 (Art. 773 Abs. 1 OR). At first glance, this capital looks like a hurdle. At the same time, however, it is also a signal: the LLC is legally clearly organized, registered in the commercial register, and capable of acting as an independent company.

The LLC does not arise simply through your business activity. It is established in a public deed. In this process, the founders declare that they are founding an LLC, define the articles of association, and appoint the governing bodies (Art. 777 Abs. 1 OR). The LLC acquires legal personality upon entry in the commercial register (Art. 779 Abs. 1 OR).

This brings more effort, but also more structure. The LLC is particularly suitable if:

• you have larger clients or suppliers

• you conclude contracts with significant liability risk

• you want to hire employees

• several people are to be involved

• you want to sell your company or transfer shares later on

• you want to present yourself more professionally to the outside world

The LLC is more flexible than the sole proprietorship when it comes to the name. Commercial companies can generally choose their company name freely, but must indicate the legal form (Art. 950 Abs. 1 OR). In the case of an LLC, the legal form suffix is therefore part of the name.

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LLC or sole proprietorship: Which is cheaper?

In short: The sole proprietorship is almost always cheaper at the start. The LLC costs more, but can be worth it if the risk is higher.

With a sole proprietorship, there are usually fewer incorporation costs. There is no need for a public notarization and no statutory minimum capital. If you are still below the sales threshold for voluntary registration in the commercial register, the entry remains particularly lean (Art. 931 Abs. 1 OR).

With an LLC, you have to expect incorporation costs, public notarization, commercial register entry, and share capital. The minimum share capital is CHF 20'000 (Art. 773 Abs. 1 OR). However, it is important to know: This money is not simply gone. It belongs to the LLC after incorporation and can be used for the company within the scope of the statutory purpose.

Therefore, the cheaper start is not always the better choice. If a single liability case could jeopardize your private assets, the LLC can make more sense despite higher initial costs.

Which legal form is better from a tax perspective?

Tax-wise, there is no answer that is always correct.

In the case of a sole proprietorship, the business and the private individual are considered more closely together. The profit from the business activity flows economically directly to you. This can be simple and efficient for smaller profits.

In the case of an LLC, the company is treated as a separate tax subject. It generates profit, pays tax on it, and can pay out a salary or dividends to you as a shareholder. This creates more structuring possibilities, but also more complexity.

For value added tax, the legal form is not the decisive point. Anyone who operates a business and meets the legal requirements is subject to tax, regardless of legal form, purpose, and profit intention (Art. 10 Abs. 1 MWSTG). Anyone who generates less than CHF 100'000 in turnover from taxable services within one year is fundamentally exempt from tax liability (Art. 10 Abs. 2 lit. a MWSTG).

Therefore, the question LLC or sole proprietorship? should never be answered solely from a tax perspective. Liability, growth, administration, and social security are at least as important.

How do accounting and administration differ?

The sole proprietorship is administratively simpler.

As long as a sole proprietorship generates less than CHF 500'000 in sales revenue, simplified bookkeeping of income, expenses, and asset status is sufficient (Art. 957 Abs. 2 Ziff. 1 OR). This is a strong argument for many founders.

The LLC is a legal entity and as such is subject to the obligation of bookkeeping and accounting (Art. 957 Abs. 1 Ziff. 2 OR). In addition, there are company law formalities such as articles of association, governing bodies, registration in the commercial register, and other obligations depending on the situation.

On the other hand, the LLC is more clearly separated from the private sphere. This can facilitate cooperation with banks, investors, business partners, and larger clients.

Comparison: LLC or sole proprietorship at a glance

Decision rule: Which legal form suits you?

If you start alone, have hardly any risks, and want to test your idea first, the sole proprietorship is often the more pragmatic solution.

If, however, you already know that your company is to grow, if you conclude contracts with higher amounts, or if you want to protect your private assets better, the LLC is usually the more solid choice.

A simple rule of thumb is:

• Sole proprietorship, if you want to start fast, cheaply, and uncomplicatedly.

• LLC, if liability, professionalism, and growth are more important than low startup costs.

Conclusion: LLC or sole proprietorship?

The sole proprietorship is ideal for a simple start with manageable risk. The LLC makes more sense if you want to limit liability, appear more professional, and align your company for long-term growth.

The best choice therefore does not only depend on the price. Capital, what risk you want to bear, how large your business is to become, and how much structure you need from the very beginning are crucial.

Frequently asked questions about LLC or sole proprietorship

Can I switch from a sole proprietorship to an LLC later on?

Yes, a switch is fundamentally possible. In practice, however, this does not only mean a name change. You found a new LLC, transfer assets, adjust contracts, and settle commercial register, tax, and accounting issues neatly.

Do I have to register a sole proprietorship in the commercial register?

Not always. A sole proprietorship must be registered if sales revenue of at least CHF 100'000 was achieved in the last financial year (Art. 931 Abs. 1 OR). Below this, voluntary registration is possible (Art. 931 Abs. 3 OR).

Does an LLC always protect me fully from personal liability?

No. The LLC fundamentally limits liability to corporate assets (Art. 794 OR). However, personal liability can still become an issue if, for example, you personally enter into obligations, provide securities, or violate your own duties.

Is an LLC automatically more reputable than a sole proprietorship?

Not automatically. A well-run sole proprietorship can look very professional. However, because of the commercial register entry, share capital, and clear legal structure, the LLC often has advantages with larger clients, banks, and business partners.