Your business has grown. You are signing larger contracts, considering employees or planning to bring in a partner. A sole proprietorship may have been convenient at the start but no longer meet your needs as well.
Converting a sole proprietorship into a Swiss LLC means forming a company that takes over your business. The LLC, known as a Sàrl or GmbH, has its own assets, contracts and obligations. Prepare what it will take over, what remains in your name and how you will continue working.
Tax is part of that preparation. The much-discussed five-year period becomes clearer when you distinguish the assets of your self-employed business from the LLC interests you will own. We explain the logic step by step, with a worked example.
Before switching to an LLC: the essentials
- The LLC is a new legal entity: the sole proprietorship’s business must be transferred to it.
- Minimum capital is CHF 20,000, contributed in cash or, subject to conditions, business assets.
- A transfer balance sheet identifies the assets, debts and cash the company will receive.
- The transfer can avoid immediate taxation of hidden reserves if the tax conditions are satisfied.
- Selling interests within five years can trigger retrospective taxation of transferred hidden reserves.
- Existing debts and personal guarantees must be addressed; forming the LLC does not make them disappear.
Planning your LLC formation? Explore our Swiss LLC formation service. Tell us at the outset if you already operate a sole proprietorship: its transfer and tax treatment need coordinating with incorporation.
Why convert a sole proprietorship into an LLC?
As a sole proprietor, you operate in your own name. If the business cannot pay, your personal assets may be exposed. An LLC creates separation: generally, it is liable for its debts with its own assets. The protection is not absolute. A bank guarantee or breach of management duties can still create personal liability.
An LLC also makes it easier to bring in a partner. Each member owns interests, with decisions organised through the articles and agreements between members. This provides a framework for growth and a future transfer of ownership.
Consider costs and remuneration too. The company pays its taxes; you personally declare salary, dividends and the taxable value of your interests. Assess what changes in your actual circumstances. Our sole proprietorship versus LLC comparison helps you do that.
How does the business move into the LLC?
Decide together how to fund the LLC’s capital and how to transfer the existing activity. You can use eligible business assets to form the company, or pay cash capital and arrange a subsequent takeover. In either case, identify the assets, debts and contracts involved.
Contribute business assets towards the capital
Instead of contributing only cash, you can transfer equipment, inventory or other eligible assets. This is a contribution in kind. The relevant figure is net value: debts assumed by the LLC reduce the amount effectively contributed.
If net value falls short of CHF 20,000, you can add cash. Assets must be valued and the transaction documented, including a contribution agreement, formation report and verification certificate from a licensed auditor. Our guide to Swiss contributions in kind explains the requirements.
Form the LLC with cash, then transfer the business
You can also pay cash capital and transfer the business under a takeover agreement. This may simplify incorporation but does not itself resolve debt transfers, contracts or taxation.
The five-year tax rule can apply under this method too. What matters is how the business transfers and how its tax values are treated. Paying initial capital in cash does not, by itself, avoid the rule.
What does an asset transfer under the Merger Act do?
The Swiss Merger Act provides a mechanism allowing a sole proprietorship entered in the commercial register to transfer assets and liabilities listed in an inventory. It can accompany a contribution in kind or another takeover arrangement.
Distinguish the contribution, which funds capital, from the statutory asset transfer, which moves assets and obligations to the company. Review contracts and permits within that framework, including creditor-protection rules.
Example: understanding the transfer balance sheet
Suppose your sole proprietorship transfers CHF 100,000 of assets and receivables together with CHF 60,000 of debt. The net contribution is CHF 40,000, potentially allocated as CHF 20,000 share capital and CHF 20,000 share premium, also called agio.
| Assets transferred | CHF | Funding after transfer | CHF |
|---|---|---|---|
| Bank | 10,000 | Transferred liabilities | 60,000 |
| Trade receivables | 25,000 | Share capital | 20,000 |
| Inventory and equipment | 65,000 | Share premium | 20,000 |
| Total | 100,000 | Total | 100,000 |
The CHF 40,000 is equity contributed to the company. Share premium is therefore not automatically money the LLC owes you. If part of the consideration is instead a debt payable to you, record it in the transaction documents and review its tax treatment.
Also note the bank balance: only CHF 10,000 is available. If the LLC must pay CHF 30,000 to suppliers before collecting customer invoices, it is CHF 20,000 short. A balanced balance sheet is not enough; plan payments too. Our working capital guide (in French) explains the gap between sales and cash receipts.
Tax implications: understanding the five-year period
Follow what you own before and after moving to an LLC. The business continues, but your ownership changes: previously you owned the sole proprietorship’s assets directly; afterwards you own interests in a company that owns those assets.
Private assets and business assets: what is the difference?
Business assets serve wholly or mainly your self-employed activity, such as workshop machinery, inventory and unpaid customer invoices. Although you and your sole proprietorship are one legal person, tax law distinguishes those assets from private property.
Profit from selling a business asset generally forms part of taxable self-employment income under Article 18(2) of the Federal Act on Direct Federal Taxation (DFTA) (in French).
Private assets are assets outside that self-employed activity. LLC interests held personally may qualify, even if you work for the company as an employee. Classification nevertheless depends on your circumstances. Gains on securities held as private assets are generally exempt from income tax under Article 16(3) DFTA (in French). This concerns sale gains; salaries and dividends follow their own tax rules.
What are hidden reserves?
Over time, the actual value of your business may exceed its tax value. Depreciated equipment may still be valuable; an established customer base can create value absent from the balance sheet. The difference represents hidden reserves: economic value not yet taxed.
If you sell the sole proprietorship’s business directly, those reserves may become taxable profit. The law nevertheless permits a business transfer to an LLC without immediate taxation if conditions are met. In particular, Swiss tax liability must continue, existing tax values must carry over and the transfer must cover a business or a distinct business unit. A few isolated assets may be insufficient. This regime appears in Article 19(1)(b) DFTA (in French).
The LLC therefore takes over existing tax values. This is called tax neutrality, but the hidden reserves do not disappear: if the company later realises them, for example by selling assets, they may be taxed at company level.
Why is there a five-year restriction?
Without a special rule, a self-employed owner could transfer a business into an LLC without immediate tax and quickly sell the interests as a private investment. A gain arising in the business could thus become a tax-exempt private gain.
Article 19(2) DFTA (in French) addresses this: if interests are sold within five years for more than the corresponding tax value of transferred equity, the transferred hidden reserves are taxed retrospectively. A partial sale triggers taxation of the relevant proportion.
Transferred equity for tax purposes is not necessarily limited to CHF 20,000 share capital. It may include other recognised contributions. Establish that value in the transfer documentation to use the correct comparison.
You can legally sell before five years. The period governs tax consequences. It does not mean your interests become private assets only after five years: they may already be private while still subject to this retrospective-tax rule.
Example: selling after three years
Consider a business with CHF 40,000 net tax value—asset tax values less liabilities—fully contributed as LLC equity. Assume its net economic value is CHF 140,000. Transferred hidden reserves are therefore CHF 100,000. If all conditions are satisfied, transferring at tax values does not immediately tax those reserves.
Three years later, you sell all interests for CHF 140,000. The price exceeds the CHF 40,000 transferred tax equity: CHF 100,000 of hidden reserves is then included retrospectively in your former self-employment income for the transfer year.
CHF 100,000 is additional taxable income, not the tax bill. The actual tax depends on your circumstances. If you sold only half the interests for CHF 70,000, the example would trigger retrospective taxation of CHF 50,000 in hidden reserves. The company may reflect the reserves thus taxed in its tax values under Article 19(2) DFTA.
Simplified example excluding other adjustments and tax or social insurance consequences. It illustrates the mechanism, not a personal tax calculation.
When does the five-year period start?
The period is linked to the legal transfer. Where registration is required, the decisive date is the application for entry in the commercial register; otherwise, it is the transfer of ownership. Retroactive accounting or tax treatment does not start the five years earlier. See FTA Circular No. 5a, section 3.2.2.4 (in French).
Record the start and expiry dates. If you plan to bring in a partner or sell some interests, you can check consequences before committing.
What happens after five years?
A sale after expiry no longer triggers this restructuring-related retrospective taxation. If the interests are private assets, the gain may fall under Article 16(3) DFTA’s exemption, subject to other rules applicable to the sale.
Distinguish selling your interests from the LLC selling its machinery, customer base or business. In the latter case, the company realises the profit. Waiting five years does not make every sale or distribution tax-free.
A different five-year period may apply to a share sale
Indirect partial liquidation is a separate rule under Article 20a(1)(a) and (2) DFTA (in French). It may concern a sale of at least 20% of a company where securities move from your private assets into the buyer’s business assets, for example an acquisition company.
The risk arises if, within five years after the sale, the buyer distributes resources that already existed at acquisition, were distributable and were not required for operations. Seller involvement is another condition: it can arise where the seller knew or should have known that those resources would finance the price without being restored.
A sale after the restructuring restriction expires can therefore still fall within this second rule. The first period starts with the business transfer; the second relates to the share sale. Review the buyer’s financing and contractual protections when preparing a sale.
Ongoing taxes and VAT
After transfer, the LLC pays corporate income tax and cantonal capital tax. Your salary is generally an expense for the company and income for you. Dividends follow different rules, with partial taxation possible under conditions. A calculation helps compare overall costs with your sole proprietorship.
VAT needs separate treatment. A notification procedure may apply, or be compulsory, for the business transfer. Check Article 38 of the VAT Act and FTA formalities: the new LLC does not simply inherit the sole proprietorship’s VAT number.
How to organise the transition step by step
Once the transfer structure and tax consequences are clear, coordinate accounts, the notary, contracts and invoicing on one timetable.
1. Prepare the balance sheet and set the dates
List assets, receivables, debts and commitments. Review doubtful invoices; fully depreciated machinery may still be valuable. Distinguish accounting figures, tax values and what can actually be contributed to the LLC.
The start of a financial year is often convenient. Retroactive tax treatment may be accepted under conditions, notably filing the registration application and incorporation documents within six months of the transfer balance sheet date, leading to unconditional registration. Do not confuse this deadline with the five-year period above.
Then set the legal transfer date and the date the LLC starts invoicing. These must match the documents: tax treatment from the start of the year does not mean the company legally existed then.
2. Confirm the transfer and form the LLC
Document what transfers, its value and what you receive: interests, share premium or a claim against the company. Where significant tax issues arise, an advance tax ruling lets the competent authority review the proposed treatment before implementation.
Finalise the company name, registered office, purpose, articles and management. Incorporation requires a notarised deed followed by commercial registration. Our Swiss LLC formation guide explains the process.
Starting an LLC in Switzerland: the steps to incorporation
Watch the steps involved in setting up your new company. To transfer your sole proprietorship, combine them with the balance sheet, contract review and tax analysis explained in this guide.
3. Arrange the transfer of contracts and employees
Leases, leasing agreements, insurance, customer contracts and licences are often in your name. Check which will transfer and what consent is required, so the new company can actually use the premises, equipment and services needed to operate.
If you employ staff, employment relationships generally transfer to the LLC with the business, subject notably to the right to object under Article 333 CO. Inform employees in time and consult them if measures affecting them are planned. A new employment contract is not automatically required for each person.
4. Prepare invoicing, payments and closure of the sole proprietorship
The LLC receives its own business identification number (UID). It needs its own bank account, insurance and required social insurance registrations. Clarify any VAT registration before issuing the first invoices.
Tell customers the new legal name, bank details and effective date. Distinguish old invoices, advance payments and work in progress to avoid payments reaching the wrong account or invoices naming the wrong supplier. Include online payments and recurring contracts.
A newly incorporated LLC covered by Swiss transparency legislation must also report its beneficial owners—the individuals ultimately controlling it—to the Swiss transparency register, TranspaReg. Under the regime effective from 1 October 2026, reporting is required within one month of the new company’s commercial registration.
Finally, close the sole proprietorship’s accounts, report cessation to the relevant bodies and request commercial-register deletion if it was registered and the individual activity has actually ended. Coordinate this with the LLC’s launch to maintain services and track collections.
Your position after switching to an LLC
Working for your LLC for a salary generally gives you employee status for that activity. The company must arrange remuneration, social insurance contributions, accident insurance and occupational pensions when enrolment conditions are met.
One often misunderstood consequence: paying unemployment insurance contributions is not enough to receive benefits while you retain decisive influence over the business. Our guide to unemployment benefits for Swiss LLC owner-managers explains this.
You must also keep full accounts and separate company spending from personal expenses. Money in the LLC’s account belongs to the company; withdrawals need a proper basis such as salary, justified reimbursement or another documented transaction.
Review earlier commitments too. A personal guarantee does not disappear on transfer. For a statutory asset transfer, Article 75 of the Merger Act also provides joint and several liability for former debtors concerning earlier debts, with a three-year period from publication or, for a claim falling due later, from its due date. Obtain confirmation of which obligations you are actually released from.
Prepare an LLC ready to take over
A successful transition lets the new company continue without uncertainty: contracts are addressed, customers know who invoices them and cash covers the first payment dates.
Start with the transfer balance sheet and your plans for the coming years. Mention any intended sale or new partner at this stage: the five-year period and treatment of the interests belong in the preparation.
Frequently asked questions
Can I form an LLC without CHF 20,000 in cash?
Yes. Eligible assets can cover all or part of the capital through a contribution in kind, subject to their net value and the required valuation and verification formalities. The minimum share capital remains CHF 20,000 and must be fully paid up.
Do I have to keep my LLC membership interests for five years?
You may legally sell them earlier. However, selling within five years for more than the corresponding transferred equity at its tax value can trigger retrospective taxation of the relevant share of the hidden reserves transferred. Assess the tax consequences before agreeing to a sale.
Do the membership interests become private assets only after five years?
No. Depending on the circumstances, they can be private assets from the outset. The five-year restriction concerns the tax treatment of the restructuring; it does not determine asset classification on its own.
Is selling the membership interests always tax-free after five years?
No. Expiry of the restructuring period removes that particular clawback risk. The conditions for an exempt private capital gain still need to be met. Indirect partial liquidation, for example, can make part of the proceeds taxable.
Do I need to change the business name?
The new company’s legal name must meet the rules for an LLC, including the legal-form designation such as Sàrl. Check availability even if you intend to retain the same trading name.
Can a sole proprietorship become an SA instead?
Yes. An SA can take over the business, subject to the applicable transfer, incorporation and capital requirements. This is not simply a change of name in the commercial register.
Sources and references
Tax references checked on 2 November 2026. These simplified examples illustrate the principles and do not constitute a tax ruling. English versions are linked where available; French-language sources are marked.
- Federal Act on Direct Federal Taxation: Article 16(3) (private capital gains), Article 18(2) (business assets), Article 19 (restructuring) and Article 20a (indirect partial liquidation) (in French).
- FTA Circular 5a, section 3.2: transferring a sole proprietorship or partnership to a legal entity (in French).
- FTA Circular 14 on indirect partial liquidation (in French).
- Merger Act: Articles 69–77, transfers of assets and creditor protection (in French).
- Code of Obligations: LLC incorporation, capital contributions and transfers of employment relationships.
- FTA VAT forms, including the notification procedure under Article 38 VAT Act.
- TranspaReg: company reporting obligations and deadlines (in French).
Plan your move from sole proprietorship to LLC
Review your situation, remuneration and the steps ahead in a consultation with a qualified chartered accountant.
Romain Prieur is a Swiss certified public accountant and the founder of Entreprendre.ch. With more than ten years of experience in auditing and supporting Swiss businesses, he advises entrepreneurs on company formation, accounting and taxation.
