Should you become self-employed or establish a legal entity to start a business in Switzerland?

When an entrepreneur in Switzerland wants to start a business, they must decide between operating as a sole proprietorship or establishing a legal entity (a public limited company [SA] or a limited liability company [Sàrl]). This choice has significant implications in terms of liability, taxation, and social security. The right option largely depends on the nature and scale of the project. Here is an overview of the advantages and disadvantages of each option.

Sole Proprietorship: flexibility and simplicity

A sole proprietorship is the simplest way to start a business in Switzerland. It is suitable for projects requiring minimal investment, with no plans for medium-term hiring, and no need for business partners.

Advantages

• Simple setup and management: no minimum capital required, minimal administrative formalities. As a sole proprietor, you must contact your AVS (social security) compensation fund to obtain self-employed status. There is no need to draft articles of association or consult a notary.
• Low setup costs: registration in the commercial register is optional for businesses with an annual turnover below CHF 100,000. However, registering can enhance your commercial credibility.
• Direct taxation of profits: the entrepreneur is taxed under personal income tax rather than corporate tax.
• Management freedom: for businesses with an annual turnover below CHF 500,000, simplified accounting (tracking income and expenses) is sufficient, with no mandatory audits. If turnover exceeds this threshold, double-entry bookkeeping, annual financial statements, and profit-and-loss accounts are required (Articles 957 et seq. of the Swiss Code of Obligations).

Disadvantages

• Unlimited liability: the entrepreneur is personally liable for all business debts. In case of financial difficulties, they may face bankruptcy proceedings and need to use personal assets to settle business liabilities.
• Lower credibility: business partners and investors often prefer dealing with incorporated entities.
• Limited social security protection: no mandatory pension fund (LPP) contributions, making entrepreneurs reliant on personal retirement savings.
• Difficulty in separating personal and business finances.

Incorporation: protection and tax optimisation

Creating an SA or Sàrl allows an entrepreneur to separate personal assets from business assets.

Advantages

• Limited liability: shareholders or partners are only liable up to their investment.
• Better social security coverage: mandatory pension fund (LPP) contributions above a certain salary threshold provide improved protection in case of disability or death.
• Tax optimisation: profits are subject to corporate tax, which can be more favourable than personal income tax for high earnings. Tailored pension plans can optimise tax efficiency for both the entrepreneur and the company.
• Increased credibility: in business relationships, an SA/Sàrl is often perceived as more professional and reliable, making it easier to attract investors and partners.
• Easier transferability: a company can be sold or transferred more easily than a sole proprietorship.

Disadvantages

• Higher setup costs: a minimum capital of CHF 20,000 is required for a Sàrl and CHF 100,000 for an SA, which may be a barrier for some entrepreneurs.
• More complex accounting and administrative obligations: companies must maintain double-entry bookkeeping and file financial statements. The incorporation process is more complex than setting up a sole proprietorship, requiring a foundation deed, articles of association, and mandatory commercial register entry.
• Double taxation: the company is taxed on its profits, and dividends are subject to taxation at the shareholder level.

Pension and social security protection

Social security contributions depend on the chosen business structure:

• Sole proprietorship: no mandatory second-pillar pension fund (LPP) contributions, but entrepreneurs can opt for a third-pillar pension plan (3a) to reduce taxable income and build retirement savings.
• Company (SA/Sàrl): mandatory pension fund contributions apply once the salary exceeds CHF 22,680 (2025 threshold). This provides better protection in case of incapacity and allows for higher retirement savings. Entrepreneurs can optimise their tax burden by implementing customised pension schemes.

Tax implications and optimisation

The choice between a sole proprietorship and a company has tax implications:

• Sole proprietorship: profits are taxed under personal income tax and subject to AVS social security contributions. The entrepreneur cannot defer taxation.
• Company: profits are taxed separately from the entrepreneur’s income, and dividends benefit from partial tax relief if the entrepreneur holds a qualified stake (over 10% of share capital).
• Third-pillar pension plan (3a): an attractive tax tool for self-employed individuals, allowing them to reduce taxable income.

When to choose each structure?

• Opt for a sole proprietorship if starting with limited expenses and seeking a simple, flexible structure.
• Choose a company when profits become substantial, liability needs to be limited, or when seeking investors and employees.

The decision between a sole proprietorship and a company depends on risk exposure, tax considerations, and pension needs. Consulting a tax advisor and a pension specialist is recommended for an optimal choice. Our asset management experts are here to assist you—contact us today!