Comparison of legal forms: How to make the right choice for your company

Choosing the right legal structure for your business is crucial whether you're starting a new company or working as a freelancer. The choice depends on various factors, such as liability, required start-up capital, decision-making authority, and taxes.

In this comprehensive guide, we’ll examine Switzerland’s most popular legal forms (sole proprietorship, GmbH, and AG) plus other common structures, compare their advantages and disadvantages, and help you choose the right structure for your business.

The legal form of a company refers to its specific legal structure as a legal entity and thus determines the legal framework applicable to the company. When founding a new company, numerous legal forms are available, the choice of which depends on factors such as your liability tolerance, available start-up capital, tax considerations, and long-term business goals. Common examples include the sole proprietorship, the limited liability company (GmbH), and the public limited company (AG).

The legal form of a company has numerous implications, including its operational and management structure, applicable accounting and tax regulations, and many other legal and personal consequences related to liability, data protection, risk, costs, etc. Choosing the right legal form for your company is therefore crucial to ensuring its success and longevity.

The three primary legal forms for businesses in Switzerland are: sole proprietorships for individual entrepreneurs, GmbHs for small to medium enterprises seeking limited liability, and AGs for larger companies requiring significant capital or public investment.

Below, we provide an overview of the most common legal forms of business in Switzerland. The first three legal forms—sole proprietorship, limited liability company (GmbH), and public limited company (AG)—are analyzed in more detail, as they are the most frequently chosen. We also provide a brief overview of some other legal forms commonly used in Switzerland.

Sole proprietorship

A sole proprietorship is Switzerland's simplest business structure, owned and operated by one individual who assumes unlimited personal liability but enjoys complete operational freedom and straightforward tax treatment.

The sole proprietorship is the most popular legal form in Switzerland because it is simple and has no incorporation requirements. It is also the standard legal form for anyone running their own business who does not specifically choose one of the other legal forms listed below. A sole proprietorship can only be established by a natural person and is legally inseparable from the owner. It has a single owner, who is referred to as the "sole proprietor."

Sole proprietorships can be further categorized depending on whether they are registered and required to keep accounts, which in turn largely depends on their annual turnover. Specifically, sole proprietorships with an annual turnover of CHF 100,000 or more are required to register in the commercial register and keep accounts. Double-entry bookkeeping is mandatory for annual turnovers exceeding CHF 500,000.

Advantages of a sole proprietorship

• No minimum share capital requirements.
• A formal incorporation process is not required, as the sole proprietorship is not a separate legal entity.
• Minimal administrative effort and no special administrative formalities.
• Avoidance of double taxation, as taxation is based entirely on the "pass-through" principle, i.e., the owner is liable for the taxes in their personal capacity.
• Registration in the commercial register is only required if the annual turnover exceeds CHF 100,000.
• Double-entry bookkeeping is only required for sole proprietorships with an annual turnover of more than CHF 500,000.

Disadvantages of a sole proprietorship

• Unlimited liability: The main disadvantage of a sole proprietorship is that the owner is personally liable for the company's debts and obligations. Since the business does not exist as a separate legal entity, it cannot be sued in its own name, meaning the owner is fully responsible for all claims against the business in their personal capacity.
• The transfer of ownership is complex because the company does not exist as an independent entity.
• The company cannot be converted into a GmbH or AG without first being liquidated.
• Compared to limited liability companies and public limited companies, it is more difficult to obtain a loan.
• The company name cannot be freely chosen and must include the founder's surname, with or without their first name. Furthermore, name protection is geographically limited.

Limited liability company (GmbH)

A GmbH combines the liability protection of a corporation with relatively low capital requirements (CHF 20,000), making it Switzerland's preferred choice for SMEs seeking growth without excessive formality.

The limited liability company (GmbH) is an extremely popular and versatile legal form in Switzerland for small and medium-sized enterprises as well as family businesses. It is the third most common legal form for companies in Switzerland, after sole proprietorships and public limited companies.

A limited liability company (GmbH) is a separate legal entity and is founded by one or more people who join together to establish the business. The shareholders can be either natural or legal persons. The shareholders of a GmbH are liable for the company's debts only up to the amount of their capital contribution.

Many successful businesses begin as sole proprietorships and later convert to a GmbH as their operations expand. As revenues increase and business risks grow, the GmbH structure provides the liability protection and credibility that growing enterprises need without the higher capital and administrative requirements of an AG.

Advantages of a GmbH (limited liability company)

• Limited liability: The main advantage of a GmbH (limited liability company) is that, unlike a sole proprietorship, it offers its owners limited liability protection. This means that the shareholders are not personally liable for the company's debts and will typically not lose more than they have invested in the company.*

• Low minimum share capital of only CHF 20,000. This is a significant increase compared to the zero capital of a sole proprietorship, but still relatively low compared to other legal forms such as a public limited company, which requires share capital of CHF 100,000 (of which at least CHF 50,000 must be paid in).

• Only one or more owners are required, who can be natural or legal persons.

• The company name can be freely chosen as long as it contains the abbreviation "GmbH" and meets other naming requirements, such as being unambiguous and not offensive.

• A limited liability company (GmbH) can easily be converted into a public limited company (AG) without having to be dissolved beforehand. This allows for simpler expansion as the business grows and develops, and greater flexibility in the future.

• Owners of a limited liability company (GmbH) do not have to pay taxes on a profit from the sale of their shares – unless the transaction meets the criteria of a direct or indirect partial liquidation or a transposition (Art. 20a DBG).

*Note, limited liability protection has exceptions—directors and shareholders can face personal liability in cases of intentional wrongdoing, breach of fiduciary duties, or failure to comply with legal obligations.

Disadvantages of a GmbH

While the GmbH (limited liability company) is considered a relatively simple legal form, the administrative requirements for its establishment are significantly more extensive than for a sole proprietorship:

• All limited liability companies (GmbHs) must register in the commercial register and present a notarized deed of incorporation.
• A limited liability company (GmbH) must draw up articles of association that include information about the company name, registered office, and purpose, as well as the amount of share capital and the contribution paid in by each shareholder. It is also advisable to include further points in the articles of association, such as management, representation, contributions in kind, and procedures for increasing the share capital.
• A general meeting must be held between the members.
• In some cases, an audit may be mandatory; in this case, an external auditor must be appointed.
• The start-up and incorporation costs are lower than for a public limited company, but significantly higher than for a sole proprietorship, which can make a GmbH less attractive for small business owners and self-employed individuals.
• GmbHs are subject to double taxation, as the profits are first taxed at the company level and then potentially taxed again at the personal level when distributed to the GmbH members. In some cases, this is mitigated by the partial taxation of dividends.
• Managing directors of a limited liability company (GmbH) in Switzerland are not entitled to unemployment benefits as long as they officially hold their position within the company. They are only entitled to benefits if the company is liquidated or if they resign from their position.
• Privacy is less pronounced compared to a public limited company (AG), and the names of the owners are publicly visible along with the company name.

For a more in-depth exploration of the advantages and disadvantages of a GmbH in Switzerland, read our blog on the topic.

Public limited company (AG)

The public limited company combines maximum flexibility for capital raising with strong shareholder privacy protections, though it requires the highest share capital (CHF 100,000) among common Swiss business structures.

Like the limited liability company (GmbH), the public limited company (AG) is an independent legal entity that can be founded by one or more natural or legal persons. The public limited company is the most frequently chosen legal form among corporations in Switzerland. It is usually chosen by companies with higher capital requirements and is suitable for almost all types of profit-oriented businesses.

As an independent legal entity, a public limited company (AG) offers its owners (shareholders) limited liability protection . Shares in public limited companies can be publicly traded on the stock exchange, which gives the company much greater scope for expanding its activities through public capital raising. However, its size and scope also have some disadvantages. It is the most complex and expensive of all the legal forms mentioned so far and is subject to the strictest regulatory and reporting requirements.

Advantages of a public limited company

• Access to capital: One of the main advantages of a public limited company (AG) is that it offers access to capital, as shares can be publicly issued and are easily tradable.
• A public limited company (AG) is a separate legal entity and therefore offers its shareholders limited liability protection. A shareholder is only liable up to the amount they have invested in the company (i.e., with the shares they own). Note that certain circumstances can override this limited liability protection (aka “piercing the corporate veil”), particularly for directors and controlling shareholders.
• It is easier to raise capital in the form of loans, as public limited companies are considered the most reputable and creditworthy of the various legal forms mentioned.
• A public limited company offers a much higher degree of privacy, as it is possible to own shares anonymously.
• The company name can be freely chosen.
• Owners of a corporation do not have to pay tax on a profit from the sale of their shares – unless the transaction meets the criteria of a direct or indirect partial liquidation or a transposition.

Disadvantages of a public limited company

• The AG (public limited company) has the highest minimum capital requirement of CHF 100,000, of which at least 20% or CHF 50,000 (whichever is higher) must be paid in upon incorporation.
• The incorporation and administrative formalities are even more extensive than for a GmbH (limited liability company).
• Stricter accounting regulations apply to public limited companies (AGs). Listed public limited companies must adhere to Swiss GAAP FER or another suitable accounting standard (e.g., IFRS).
• AGs are subject to double taxation, as profits are first taxed at the corporate level and then again at the personal level when they are distributed to shareholders in the form of dividends. In some cases, this is mitigated by the partial taxation of dividends.
• There are strict regulations regarding the formation of statutory reserves, measures in the event of over-indebtedness, etc.
• Managing directors and all persons who exert significant influence on the company's decisions are not entitled to unemployment benefits in a Swiss public limited company (AG) as long as they officially hold their position within the company. They are only entitled to benefits if the company is liquidated or if they resign from their position.

For a more in-depth exploration of the advantages and disadvantages of an AG in Switzerland, read our blog on the topic.