From sole proprietorship to LLC: Everything you need to know

Introduction

Converting a sole proprietorship into a limited liability company (LLC) is a key milestone in a company’s development. This strategic decision opens up new opportunities for entrepreneurs. Limited liability protects private assets, while improved capital acquisition allows for growth opportunities.

In this article, we will explain the key aspects of the conversion process. You will receive practical information on legal requirements, tax implications, and necessary preparation steps:

• Legal foundations of the conversion

• Advantages of converting into an LLC

• Preparation for the conversion

• Required documents

• Timeframe of the conversion process

• Tax aspects

• Conclusion

Legal foundations of the conversion

The sole proprietorship represents the simplest form of business - a company with a sole owner who is fully liable with his private assets. The LLC (Limited Liability Company) is a legal entity where liability is limited to the company's assets.

The direct conversion of a sole proprietorship into an LLC is not possible under the Transformation Act. However, there are two practical ways to achieve the desired goal:

Founding through contribution in kind:

• Establishment of a new LLC

• The existing sole proprietorship is contributed as an asset to the LLC

• Valuation of the sole proprietorship by a licensed auditor

• Acquisition of all assets and liabilities of the sole proprietorship

• After successful transfer, the sole proprietorship is deleted

It should be noted here, that the contribution in kind can only take place if the surplus of assets of the sole proprietorship is higher than the required minimum capital of the company to be founded, namely CHF 20,000 for an LLC.

Practical example:

Mr. Müller has been successfully running his printing business as a sole proprietorship for 15 years. With growing business success and an increasing number of employees, he decides to convert into an LLC.

Initial situation:

• Annual turnover: 500,000 CHF

• 8 employees

• Surplus assets: 40,000 CHF

• Various machines and operating equipment

Conversion process:

At the beginning of the conversion process, a current interim balance sheet was prepared to determine the exact value of the company. The annual financial statement or interim balance sheet must not be older than 6 months. An auditor then conducted a detailed valuation of all business assets. Based on these foundations, the "Müller Druckerei LLC" was founded, with a share capital of 25,000 CHF established. The existing sole proprietorship was contributed as an asset to the new LLC, transferring all assets. With the difference to the surplus assets of 15,000 CHF, there remains a claim of this amount against the LLC. In this course, all existing contracts and employment relationships also had to be transferred to the new company. The completion of the conversion process was the official registration of the new LLC in the commercial register.

After a successful conversion, Mr. Müller benefits from limited liability and better tax planning options.

New establishment with liquidation (alternative):

• Dissolution of the existing sole proprietorship

• Parallel new establishment of an LLC

• Transfer of desired assets

• No obligation to assume all assets and liabilities

• More flexible structuring options

The choice of the appropriate method depends on individual circumstances and goals. Professional advice is recommended to determine the optimal path.

Advantages of converting into an LLC

The limitation of liability is a central advantage of the LLC. The personal assets of the shareholders remain protected, as only the company's assets are liable for business obligations. This clear separation between personal and business assets provides entrepreneurs with a secure basis for business decisions.

The LLC structure facilitates capital acquisition through:

• Incorporation of new shareholders

• Sale of business shares

• Increased creditworthiness with banks

The professional image of an LLC can positively impact business relationships. Customers and business partners often perceive the legal form as a sign of seriousness and sustainable corporate governance.

The position as a legal entity opens additional options for business expansion and simplifies long-term succession planning.

Preparation

The conversion balance sheet forms the foundation for converting a sole proprietorship into an LLC. This balance sheet documents:

• All assets (assets)

• All liabilities (liabilities)

• The current business value

• Hidden reserves

Important: The balance sheet must not be older than 6 months.

The commercial register entry is made by:

• Submission of all certified documents

• Presentation of the conversion balance sheet

• Proof of share capital

• Signatures of the managing directors

The notarization of the documents is mandatory.

The correct preparation of these documents ensures a smooth conversion process.

Required documents for the conversion

The conversion of a sole proprietorship into an LLC requires careful documentation. The following documents are mandatory:

• Conversion balance sheet (maximum 6 months old)

• Current commercial register excerpt of the sole proprietorship

• Detailed bank statements of all business accounts

• List of open receivables and liabilities

The costs for the conversion consist of:

• Auditor fees: CHF 600-900

• Notary fees: CHF 500-1,000

• Commercial register fees: CHF 600-900

• Consulting costs: depending on complexity

The exact amount of the costs varies depending on the canton and the individual situation of the company.

Timeframe of the conversion process

The conversion of a sole proprietorship into an LLC takes on average 1-3 months. This time can vary depending on the following factors:

The complexity of the company plays a significant role, as the scope of business activities, the number of assets to be valued, and existing contractual relationships can extend the process. External factors also have a considerable impact on the timeline, such as the auditor's review. Likewise, the subsequent review by the commercial register office can vary greatly and should therefore be taken into account during planning.

Tax aspects of the conversion

The tax implications of converting a sole proprietorship into an LLC require special attention. The hidden reserves remain tax-free during the conversion as long as the tax liability remains in Switzerland, and book values are continued. Furthermore, the owner of the LLC is not permitted to sell his shares in the next five years; otherwise, a subsequent taxation of the hidden reserves takes place.

The LLC assumes the tax responsibility of the sole proprietorship seamlessly. This means:

• Retention of book values from the sole proprietorship

• Carryforward of loss carryovers

• Continuation of depreciation methods

Regarding VAT, it should be noted that the VAT reporting procedure requires special handling. The VAT number of the sole proprietorship must be deregistered and newly applied for the LLC. The tax administration checks the correct transfer of assets as part of the restructuring.

Conclusion

The conversion of a sole proprietorship into an LLC requires careful planning and professional support. The limited liability, tax advantages, and improved capital acquisition opportunities make this step attractive for many entrepreneurs.

Professional support minimizes risks and ensures a legally secure conversion. The investment in expert assistance pays off through a smooth process and long-term planning security.

The conversion of your sole proprietorship into an LLC is a significant milestone for your company - take this opportunity for sustainable growth. We are happy to support you in this next big step as an entrepreneur.