Both SA and Sàrl are taxed identically, although SA allows opacity of shareholders who are not disclosed to the publicly accessible commercial register, requires 5 times more the initial capital and is less restrictive in terms of transferring of shares. However, the differences between Sàrl and an individual entrepreneur are very significant from the point of view of corporate law, taxes, and social security contributions.
Incorporation, liability, and administration
Individual entrepreneur exists without specific incorporation procedure, although its registration is mandatory in case of annual turnover exceeding CHF 100’000. A limited liability partnership, on the other hand, requires a set of notarized documents, registration to a cantonal business register as a prerequisite, and an initial share capital of CHF 20’000. The capital is generally deposited to an escrow account in a Swiss bank, who certifies such deposit and blocks the funds until the company is duly registered. This money can then be used by the company for its commercial purposes and such escrow account is then converted into a commercial one.
In Sàrl the shareholders and their respective participations are disclosed to the public in the commercial register. Their nationality or residence does not matter, and it is possible to create Sàrl even by one sole shareholder. However, due to the separation principle, the company is managed by the nominated directors who are likewise made public. These can be both shareholders or third parties, with or without salary, of any nationality or residence, although at least one director with individual power of signature must reside in Switzerland.
The company has limited liability and shareholders are not liable with their own assets, except in case where bankruptcy is preceded by undue embezzlement of the company’s funds (clawback claims). Directors, on the other hand, have a liability to file for a bankruptcy in case of overindebtedness unless there are sound arguments that the business will be able to continue its operations and improve its financial situation. Failure to make such announcement allows creditors to sue directors for any losses accumulated as of the moment such notification should have been done. On the other hand, an individual entrepreneur is responsible with all his personal assets.
The set of administrative burdens is likewise lighter on the individual entrepreneur. There are less documents to keep track of, and accounting may generally be done in a simplified form based on cash flow, without accruals. Although the entrepreneur cannot employ himself nor conclude any kind of agreement with his business (business and owner are one whole), it is possible to employ other people, including family members, and to grant them powers of signature.
What about the taxes and social security?
Companies pay taxes on income and capital separately from its shareholders, at a fixed rate varying from one canton to another. The shareholder, in turn, pays taxes on dividends at a reduced rate (in some cantons up to 50% is exempt) and on his director’s salary, if applicable. His taxes are calculated at a progressive rate, varying slightly from one canton to another. Another advantage is that this salary is a deductible expense for the company, unless, of course, it is excessive as per the market value and therefore constitutes a hidden dividend.
Social security contributions are likewise due on director’s salary, including the first pension fund, second pension fund and unemployment insurance, at a fixed rate. Half is withheld from the salary and the other is paid from the pocket of the company, again being a deductible expense, whereas the portion withheld from the salary is deductible from personal taxes. However, if the salary is insufficient as opposed to distributed dividends, the social security authorities may requalify a portion of such distributed profits as a salary and demand the payment of corresponding social charges. The profits of the company, however, are not concerned.
Individual entrepreneur contributes to the first pension fund as a percent of all his profits but cannot apply for the unemployment insurance and the second pension fund is optional. He pays taxes on his net income, less any expenses, this at a progressive rate and together with any other income.
Given the progressivity of the income tax on individuals, the optimization of taxes and social security charges by choosing one or the other legal form highly depends on the projected profitability, in which case one or the other of the choices may be more appealing.