Launching a business in Switzerland raises a key question: whether the business should be operated directly by the entrepreneur (sole proprietorship) or through a corporation (SA/Sàrl). The answer depends on several criteria, which are examined in this article.
The key preliminary issue from a tax perspective
The analysis must first move beyond comparative tables of the various legal structures to focus on a single question that captures the essence of the tax issue: Is the net profit from the business greater than the entrepreneur’s standard of living?
If not: The business’s profits are less than or equal to the entrepreneur’s standard of living, so a sole proprietorship is perfectly suited to the situation, and forming a corporation offers little additional tax benefit—at least until a potential sale. Nevertheless, forming a corporation may make sense to limit the entrepreneur’s liability to the invested capital and with a view to realizing a tax-exempt capital gain upon the sale of the business.
If so: Since the profit generated by the business exceeds the entrepreneur’s standard of living, incorporating a corporation may, in such cases, offer significant tax advantages. This allows the entrepreneur to leave within the company the portion of the profit that is not needed to cover his or her lifestyle, in order to retain it and reinvest it in the business or other projects.
A SA/Sàrl is subject tocorporate income tax, which is approximately 14% in the canton of Vaud and 14.7% in the canton of Geneva. By way of comparison, if this profit were taxed directly at the entrepreneur’s level, the entrepreneur could be subject to an income tax rate of up to 41.5% in Lausanne (VD) and approximately 43% in Geneva, plus AVS contributions (maximum rate of 10%).
A corporation thus allows the entrepreneur to defer income tax on the portion of profits not used to finance his or her lifestyle, while enabling him or her to reinvest those profits in the business or in other projects.
Let’s take, for example, the case of a doctor whose lifestyle costs CHF 100,000 per year, while his practice generates a profit of CHF 1,000,000. Operated as a sole proprietorship, this business is subject toincome tax and social security contributions on the entire profit earned—that is, CHF 1,000,000—including the CHF 900,000 that is not needed to cover the doctor’s lifestyle and that he wishes to save. The total tax burden, including AVS, will be approximately CHF 500,000 ((CHF 1,000,000 – (CHF 1,000,000 * 10%)) * 43%). After covering his living expenses and taxes, our entrepreneur will only be able to reinvest approximately CHF 400,000 (CHF 1,000,000 – 500,000 – 100,000).
It is precisely in this regard that forming a corporation can offer tax advantages. Profits that remain within the corporation are subject to corporate income tax—which is approximately 14.7% in Geneva—rather than the marginal tax rate applicable to high income in a sole proprietorship, which can reach about 43% in Geneva (+10% AVS). Let’s assume that our entrepreneur pays himself an annual salary of CHF 140,000, resulting in a net after-tax income of approximately CHF 100,000, as in our example above. In that case, the corporation will generate a gross profit of CHF 860,000 (CHF 1,000,000 – CHF 140,000), resulting in a tax liability of approximately CHF 130,000 (CHF 860,000 * 14.7%). The corporation will thus be able to reinvest CHF 730,000 (CHF 860,000 – 130,000), which is slightly less than double (CHF 730,000 vs. CHF 400,000) what our entrepreneur would have been able to reinvest had the business been organized as a sole proprietorship.
Over a period of ten to twenty years, the resulting difference in tax liability—and thus the amount the entrepreneur can reinvest—can amount to several hundred thousand, or even several million francs, depending on the level and growth of profits. In our example, the difference amounts to CHF 3.3 million over 10 years and CHF 6.6 million over 20 years… (assumptions: constant profits and tax expenses)
It should be noted, however, that using a corporation to conduct a business does not, in and of itself, eliminate income tax or social security contributions. It primarily allows these obligations to be deferred until they are distributed to the entrepreneur in the form of a salary, bonus, or dividend. In some cases, a subsequent sale of the corporation’s shares may result in a capital gain that is exempt from income tax and social security contributions.
Wealth Tax: The Blind Spot
Entrepreneurs often focus solely on income tax and social security contributions. Wealth tax, however, can represent a significant recurring expense, especially when accumulated over long periods.
In the case of a sole proprietorship, the net book assets (i.e., assets minus liabilities) are added directly to the entrepreneur’s taxable net worth. It should be noted that liabilities may be allocated among several cantons if the taxpayer conducts business in a canton other than his or her canton of residence.
Shares that are part of a taxpayer’s “private” assets are valued using the so-called “practitioners’ method,” as codified in Circular No. 28 of the Swiss Tax Conference dated August 28, 2008. Without going into technical details, this method takes into account the profits earned by the company to determine the value of the shares. The higher the company’s profit, the higher the tax value of the shares, which in turn increases the entrepreneur’s taxable assets.
In certain cantons, and provided certain conditions are met, this increase in wealth tax can be avoided by classifying the shares as part of the taxpayer’s business assets: “opted-in” business assets. This choice entails certain disadvantages, such as the taxation of capital gains upon the subsequent sale of the securities or the taxation of unrealized capital gains when the taxpayer permanently leaves Switzerland. It should be noted in this regard that this option may only be exercised in the tax return for the year in which a taxpayer acquires at least a 20% stake in a corporation.
Interim conclusion: A corporation often offers advantages in terms of income tax and social security contributions, but may result in a higher wealth tax liability. These two factors must be evaluated together before any decision is made, even though the reduction in income tax generally more than offsets the increase in wealth tax.
Withdrawal of occupational pension assets (LPP) for the purpose of starting a business
Entrepreneurs often consider withdrawing their occupational pension (LPP) savings to finance the launch of their business. Such a withdrawal does indeed constitute a legal basis for the disbursement of these savings. However, it is permitted only if the business is operated as a sole proprietorship or a partnership.
The law prohibits any withdrawal intended to finance the formation of a corporation or a limited liability company. It is, however, possible to start a business as a sole proprietorship and eventually convert it into a corporation (SA or Sàrl). Note that, in principle, the option to treat the business as a separate estate will no longer be available when converting a sole proprietorship into a corporation or a limited liability company.
Therefore, before withdrawing LPP assets, it is important to ensure that a sole proprietorship or partnership is the appropriate legal structure—at the very least for the launch of the business.
The Special Situation of Workers Who Reside in Another Canton or Abroad
Depending on where the business is conducted and where the individual resides, the legal structure chosen for the business may affect the place of taxation.
For sole proprietorships, taxation occurs at the place where the business is conducted, regardless of the entrepreneur’s place of residence. Conversely, when an entrepreneur conducts business through a corporation (SA or Sàrl) and pays himself a salary, he is generally taxed at his place of residence.
An entrepreneur who resides in the Canton of Vaud and conducts business in the Canton of Zug will naturally seek to be taxed in Zug. As a result, he or she will tend to favor a sole proprietorship. In the reverse situation (residing in Zug and conducting business in the Canton of Vaud), the same entrepreneur will choose a corporation (SA or Sàrl) to ensure that his income is taxed in Zug rather than in the Canton of Vaud.
There are, however, exceptions to these principles. For example, a cross-border worker who resides in France and is employed by a corporation with its headquarters in the canton of Geneva will be taxed at source in Geneva. If the employer has its headquarters in the canton of Vaud, the same cross-border worker will be taxed in France!
In conclusion, it is essential to consider the tax implications when choosing the legal structure and registered office of the company.
Occupational retirement plans: an often-overlooked benefit of a corporation
For sole proprietors, occupational pension coverage is not mandatory. Self-employed individuals are free to choose whether or not to contribute to this insurance, although their options for enrollment are limited: either the pension fund of their professional association or that of their employees, if they have any.
In a corporation, a shareholder is often also an employee. In such cases, the shareholder must be insured under the LPP, at least for the portion of the salary that is required to be covered by the LPP. The shareholder may freely choose his or her company’s LPP fund and, in principle, is not limited to the fund of his or her professional association.
Since the LPP is so complex, this point warrants a separate discussion. Please refer to our publication on the LPP.
As an interim conclusion, the choice of legal form affects which LPP plan applies, as well as the choice of pension fund.
Summary
| Location | Sole Proprietorship | SA or Sàrl |
| Standard of living greater than or equal to profits | Ideal | Unnecessarily complex |
| Saving a portion of one's income | Expensive | Advantageous |
| wealth tax | Net Book Assets | Potential Goodwill (IAS 28) |
| Use of LPP Assets at Startup | Possible | Prohibited |
| Intercantonal Workers | Taxed at the company's headquarters | Defeated at home |
| Cross-border workers | Taxable in Switzerland | Varies by location |
| Occupational Pension Plan (LPP) | Optional, but with limited options | Mandatory, but in principle, you can choose your health insurance provider |
Cedric Panchaud is an attorney, holds a doctorate in law, is a licensed notary, and is a certified tax expert. He regularly speaks at continuing education seminars (ISIStax, OREF/EXPERTsuisse). This article is provided for informational purposes only and does not constitute legal or tax advice.
Frequently Asked Questions
From a tax perspective, this is unlikely. When one’s lifestyle consumes most of one’s income, a sole proprietorship is simpler and just as effective. A corporation (SA) or a limited liability company (Sàrl) becomes advantageous from a tax standpoint once the entrepreneur wishes to reinvest a portion of their profits.
How much is the income tax for a corporation or a limited liability company headquartered in Geneva?
The effective tax rate is approximately 15%. This rate is significantly lower than the income tax rate that would apply to the same profits if they were earned as income from self-employment (10% AVS + approximately 43% income tax for a taxpayer domiciled in Geneva). It is precisely this difference that creates the tax advantage, which, however, applies only to the undistributed portion of the profit. Income tax is generally not eliminated, but deferred until a future distribution. The entrepreneur therefore has more money available to reinvest!
Yes. A conversion is generally possible at any time. Starting out as a sole proprietorship—for example, due to the need to draw on LPP assets—does not preclude a future transition to a corporation. However, it will generally no longer be possible to choose to have the ownership interest form part of the entrepreneur’s “elective” business assets.
This refers to Circular No. 28 of the Swiss Tax Conference (CSI), dated August 28, 2008, which was drafted by a private-law association comprising the directors of the cantonal tax administrations and the Federal Tax Administration.
It proposes a uniform method for valuing unlisted securities for the purposes of wealth tax in the various cantons. CSI 28 does not have the force of law. The Federal Supreme Court nevertheless recognizes its significant practical value, considering its method to be, in principle, appropriate and reliable for determining the market value of unlisted securities, while acknowledging that other methods may be appropriate depending on the circumstances.
The method is based primarily on the company's profitability and thus includes a goodwill component. The higher the profits, the greater the tax value of the shares.
There is no one-size-fits-all answer. An individualized analysis is essential. Depending on the chosen structure, the entrepreneur will be taxed at their place of residence (SA/Sàrl) or at the location of their business (RI). Depending on the cantons involved, the level of income, and family circumstances, the total tax burden can vary significantly depending on the structure chosen.
There is no one-size-fits-all answer. An individualized analysis is essential, as the choice of structure can determine whether taxation remains in Switzerland or, conversely, shifts to France. Depending on the cantons involved, income level, and family situation, the total tax burden can vary significantly depending on the structure chosen.
No. As a sole proprietor, the entrepreneur is liable for business debts with all of his or her assets. In principle, only a limited liability company and a corporation can limit the entrepreneur’s liability to the amount of the company’s capital stock. However, this issue goes beyond the scope of this article and warrants a separate legal analysis.
