How to Convert Your Sole Proprietorship into an Ltd.
With the successful growth of a sole proprietorship, the inclusion of additional business partners and the hiring of new employees becomes apparent. This lays the foundation for transforming your small start-up into a medium-sized company. But how do you convert a sole proprietorship into an Ltd.? We'll show you.
Legal Framework
A sole proprietorship cannot be directly converted into an Ltd. through regular transformation. However, it is possible to turn a sole proprietorship into an Ltd. Legally, this process is referred to as an asset transfer. Throughout this article, we'll use the term "transfer".
The practical effort involved in an asset transfer is somewhat more complex than a transformation or cash-based incorporation. The Swiss Merger Act (FusG) applies. To convert a sole proprietorship into an Ltd., according to Art. 69 FusG, the assets must be transferred in the form of a so-called contribution in kind. This means that the assets or parts thereof, along with liabilities, are transferred to the new company.
Decision for an Ltd.
There are clear advantages to forming an Ltd. One crucial advantage is that an Ltd. can have multiple shareholders, which limits liability. Furthermore, the transformation into an Ltd. enhances the company's reputation among contracting parties. It demonstrates that the company is establishing deeper roots in the market and growing. Another advantage is that an Ltd. can hire more employees, thereby increasing output.
Regarding liability, however, the founder of the sole proprietorship must know that they are jointly liable for the company's debts for an additional three years (Art. 75 para. 1 FusG, Art. 181 para. 2 CO).
Requirements
To convert your sole proprietorship into an Ltd., you must provide a minimum financial deposit of CHF 20,000. If your equity does not meet this amount, the difference can be contributed as an alternative by cash payment.
Moreover, only sole proprietorships registered in the commercial register can be transferred to an Ltd. Only then can all contracts with third parties be transferred to the Ltd. (asset transfer according to Art. 69 et seq. FusG).
If your company is not registered in the commercial register, you can carry out an individual succession of assets and liabilities according to Art. 101 CO. This means that all existing contracts must be transferred individually. It is essential to comply with all formal requirements and assignments, which can be a considerable effort.
Required Documents
To execute the transfer, you need to make some preparations. Here is an overview of the most important documents and procedures:
Founding Report
You must create a comprehensive founding report. Its purpose is to describe the contributions in kind thoroughly. This means that all information about the type, condition, and, of course, the value of the contributions in kind must be gathered. Furthermore, it is crucial that the specified contributions in kind are all freely available. They must not be encumbered or subject to reservation of title.
Contribution in Kind or Acquisition Agreement
This includes, in addition to the acquisition date, a complete inventory list and the price for the acquisition. This price almost always corresponds to the equity of the sole proprietorship. It is also important to list the ordinary and, if applicable, share capital of the shareholders.
Takeover Balance Sheet
This is also essential and includes an overview of the assets and liabilities to be taken over.
Selection of the Auditor
After selecting the auditor, a declaration of acceptance of the election must be submitted to the competent notary. In other words, the entity must confirm that it will carry out the audit for the Ltd. in the future. An exception exists for companies that employ no more than 10 full-time equivalents on average per year. Thanks to "opting out," these companies do not require an auditor.
Drafting Articles of Association
The company must draft articles of association, which include:
- Company name
- Business activity of the company
- Composition of the share capital
- List of shares/shareholdings
- Share register
- Transfer of registered shares
- Corporate bodies
- In case of real estate acquisition: public certification
- Powers of the general meeting
- Convening of the general meeting
- Universal meeting
- Quorum
- Voting rights and decision-making
- Election and term of office of the board of directors
- Powers and duties of the board of directors
- Board of directors meetings
- Auditor
- Financial year
- Dissolution
- Liquidation
Audit by the auditor
The correctness and completeness of the documents must be verified by a registered auditor.
Registration and Deregistration with the Commercial Register
As part of the Ltd. registration process, you must apply for the deregistration of the sole proprietorship. This does not happen automatically.
Costs, Contributions, Taxes
A transfer always entails certain costs. Additionally, an Ltd. may incur additional taxes.
Transfer Fees and Costs
Various costs are incurred during the transfer process. These include the fees for a trustee who prepares the transfer balance sheet along with the inventory. The amount for this varies considerably, so unfortunately, we cannot provide an average figure at this point.
Additionally, there are costs for preparing the necessary documents, such as the takeover agreement, the founding report, and all required certifications. These typically start from CHF 800. The additional costs for the auditor, required for the legal balance sheet and report review, average around CHF 1,500.
Costs for New Employees
If new employees are hired, as the founder, you will need to factor in payroll costs as well as tax contributions.
Taxes
The hidden reserves of the sole proprietorship are tax-neutral. This means that there are no taxes incurred during the transfer. However, this only applies if the new Ltd. also has its registered office in Switzerland. In addition, the previous values for income tax must be adopted. The lock-up period here is 5 years. During this time, the Ltd. or stakes therein cannot be sold. Otherwise, taxes must be paid retroactively for the hidden reserves.
Value Added Tax
If your sole proprietorship is subject to VAT, the notification procedure according to Art. 38 para. 1 VAT Act can be applied when transferring to an Ltd. Accordingly, you do not have to pay value-added tax for the transfer.
Founding Period
If you found an Ltd. by the end of June, it can be backdated to January 1st. This is no longer possible for foundations starting in July onwards.
Other Legal Changes
With the new legal reform, you must also comply with the guidelines of the competent commercial register office. In addition, commercial accounting according to Art. 957 et seq. CO is mandatory. Furthermore, you must apply for a new VAT number for your new Ltd.
The Alternative
An alternative to the procedure described above is the deletion of your sole proprietorship and the founding of the Ltd. This involves a so-called asset transfer, where the shareholders purchase assets after the founding. This is advisable if your sole proprietorship has not yet generated significant profits or made investments.
Legal Advice from a Corporate Lawyer
Founding an Ltd. is the first step in allowing a small business to grow. Transferring a sole proprietorship to an Ltd. involves a lot of preparation and dealings with authorities. However, it is also a relief if your sole proprietorship has already generated profits and contracts with business partners exist.
Since this is not easy for laypeople and there are also some pitfalls, it makes sense to have legal advice on your side. GetYourLawyer assists you in finding a specialist who will advise you competently and support you wholeheartedly in this endeavor. Submit your request and find a lawyer who suits you and your individual requirements.
FAQ: Converting Sole Proprietorship to an Ltd.
A direct conversion from one legal form to another is not possible. However, there is the option of transferring assets. Alternatively, the sole proprietorship can be deleted, and the Ltd. can be newly founded afterwards.
While a sole proprietorship has only one shareholder, an Ltd. can have multiple shareholders. An Ltd. can also hire more employees than a sole proprietorship. Lastly, an Ltd. generally benefits from a higher reputation among customers and business partners, as it is considered more established.
For a transfer, the capital contribution must be at least CHF 20,000. Instead of equity capital, a cash deposit can also be used if the equity capital is lower than the minimum amount. In this case, only the difference is deposited in cash. Additionally, the company must be registered in the commercial register.
Sole proprietorships without an entry in the commercial register can also be transferred, but this is somewhat more complex. Contracts with third parties must then be transferred individually, rather than as a whole. This is also referred to as individual succession.
The transfer of a sole proprietorship should be well prepared. You will need a series of documents and contracts (including a takeover agreement), which are best prepared in collaboration with an expert. Furthermore, a founding report and a balance sheet for the takeover with assets and liabilities are required.
The cost of the transfer varies depending on the situation and location of the company. On one hand, fees for a trustee are incurred, which can vary significantly. The auditor for the takeover and balance sheet audit usually costs around CHF 1,500. Furthermore, you should consider fees for the preparation and certification of documents and contracts – these typically amount to at least CHF 800.
As a company grows, the conditions and framework also change. Ideally, revenues will increase, but so will expenses. Among other things, you should consider increased employee costs and tax payments.
