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Today, we will discuss the two most common types of companies in Switzerland. We promise to avoid overwhelming you with hundreds of pieces of information or comparative tables. We will try to focus on the essentials by thinking differently with Chiara and Dominique (fictional people, although the former will arrive in a few months).
Chiara will create a sole proprietorship, and Dominique will create a limited liability company.
Both of them are like you: courageous!
1. What is a Limited Liability Company (LLC)?
A limited liability company is represented by one or more people who subscribe to shares (like subscribing to a subscription, so they commit) by paying a minimum capital of CHF 20,000. These people form a company by an authentic act thanks to a notary.
This company becomes a legal entity. The most important thing to know is the degree of responsibility. Each partner or the sole person is responsible up to the amount of the shares they bought when paying the capital and the contract between the partners.
Dominique has saved and worked to create his company. He is the sole partner of his company and holds 100% of the capital shares, so he is 100% responsible for this company.
He did some research and understands that he must apply certain principles such as:
- Registering with the commercial register in order to create the legal entity/company,
- Keeping accounts with a balance sheet and an income statement,
- Deciding what to do with profits or losses at the end of the year.
These are not all the principles that define and characterize an LLC, but they are fundamental to understanding what it involves: in-depth management governed by law: the Code of Obligations (3rd part), the Federal Income Tax Act (LIFD).
2. What is the Status of Self-Employed/Sole Proprietorship?
The status of "self-employed", "sole proprietorship", "individual enterprise" is well established in our society because it meets the need for professional freedom of certain workers. That's why it's the first form of business in Switzerland. We are flexible.
Thus, Chiara absolutely wants to remain flexible too, and then to start, she tells herself that "it's not bad".
Like Dominique, she does some research and finds information that makes her understand what she is getting into.
Her activity starts from the moment she invoices two or more clients.
For more information on this subject: How much can you invoice without being self-employed?
Once the threshold of CHF 2,300 is exceeded, you must register with the AVS. This contribution takes into account Chiara's work in preparing for her retirement.
She is not obliged to register with the commercial register to start and continue her activity. (Attention! There is a threshold of CHF 100,000 annual turnover which requires registration).
Chiara is privately liable for the financial consequences. There is no separation of assets between her and the sole proprietorship. It is the same person.
The accounting is simple: expenses VS income! Let the battle begin!
*For more information on this subject: How to keep accounts for a self-employed person in Switzerland?
3. A Little Coffee to Talk About the Differences?
Chiara and Dominique meet on the terrace of a café, the weather is nice.
They discuss the differences between the two forms of company they have chosen.
Dominique is setting up his company for the first time and doesn't really understand the risks to the assets of the individual entrepreneur and his own.
Chiara grabs a notebook and draws him a small diagram.
She explains the little details of each of the 5 steps:
"So, Dominique, let's go through the steps one by one. You see, when you create your LLC, you have to register it with the commercial register. Otherwise, you can't start your business, whereas I can. I can start my business without all that fuss. For you, it costs a bit of money. As far as I'm concerned, I will only have expenses for the tools I will use in my business at the beginning.
Once registered, your company is a legal entity. You give birth to a new entity that is subject to certain laws for its management. In the business, they say that it acquires "its personality". The individual entrepreneur that I am... soon, she will have to register with the AVS to pay social charges and contribute to retirement. So I will be under the status of 100% self-employed and this company is linked to my person. I declare a gainful activity in my name. That's it. That's the difference. I'll explain what follows next.
In the 3rd step, your company will pay you a salary as income so that you can live. On my side, I make withdrawals from the account I opened, in my name, to manage the money of my small business (Alain, if you can hear us!).
I hope it won't experience a crisis... (For Dominique it's too much! He bursts out laughing).
Here, a napkin Dominique. Then, it's the final count. On the balance sheet, we see that your company has a positive result! That's great. Several options are available to you:
- Pay yourself additional income through dividends,
- Increase the capital of your company
- Other options exist.
Ultimately, dear colleague Dominique, we will pay taxes. Have you heard of double taxation?"
The owner of the Taxe Mex brings a new coffee to Dominique and hears Chiara's last words.
4. Double Taxation
The owner says, "After 20 years of operation, I chose to pay myself a small bonus. I understood that this bonus is considered as additional income. I had to pay taxes on it even though this money had already been taxed by corporate tax... a piece of advice, young people: make the decision after studying the issue. It's always good to use this money to invest in the life of your company in the short, medium and long term."
Chiara couldn't have said it better. She adds, "You see, we come back a bit to this double identity with you. You work in a company. You are 2 distinct people. It is taxed and so are you. On my side, I am a single self-employed person. I am taxed on this income only once."
Dominique finishes his coffee, opens the little cinnamon biscuit and the pot of Cremo that accompany it. He pours the cream on the biscuit above the cup and says, "There, at least, I can be greedy."
5. Other Thoughts to Ponder: "Cogito, ergo sum" (quote from a person who played with cards)
The course of the article shows the differences between these two forms of company. The two characters are alone in running their businesses. But the strength of the LLC form is the power to join forces to bring skills, assets to the capital and to create a more complex structure. Have you found your partner?
Becoming self-employed or creating a company also means giving up the right to unemployment benefits for you and the family working in the company. The reason is simple: in your company, you are responsible for your employment. You can't fire yourself. So, it is considered that you don't have this right on the loss of employment. How to secure yourself?
The management costs of an LLC are higher than that of a self-employed person (protocols, partners' meeting, tax forms, etc.) and can be high.
The content of your LLC is less discreet than that of the self-employed. From the moment you appear in the commercial register, you give access to the names of the managers, the statutes, the amount of capital, the register of annual publications.
6. RECAP:
I hope this trip has made you want to go into a café!
To understand well:
The costs of creation, management or registration are more important for an LLC.
Here is the structure of these creation costs: Registration with the commercial register + CHF 20,000 to constitute the capital + notary fees to draft the statutes.
For the sole proprietorship (SP), the AVS registration + the file fees allow to make your activity "official".
The main difference is that the LLC is a legal entity, its creator is another person in the world of taxation. Whereas the self-employed is a single person responsible for his activity. This results in a different mode of remuneration and taxation.
It is clear that the form of company you choose is important. You can think about it while listening to this beautiful blue song: Alain Baschung, Ma petite entreprise.
Thanking you for your reading, we wish you much success in your project!