Comparison of legal forms: a practical guide to making the right choice

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When you start out and decide to set up your business, one of the questions you will soon ask yourself is: “What legal form should you choose?”

There are many choices available to you, and there are many criteria to consider as well. Depending on the activity you plan to undertake, the size of your company, or the financial means you have, the choice of legal status will not be the same! In order to determine the legal form properly and to make sure you are not mistaken, let's compare the strong and weak points for each legal form.

 

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Weighing up the benefits and drawbacks of each legal form

The sole proprietorship

The sole proprietorship is the simplest form, often used by the professions, craftsmen, consultants or traders.

This status is associated with an individual: A sole proprietorship is founded by a single natural person.

The sole proprietorship does not require any special administrative formalities, apart from an entry in the commercial register, if the turnover exceeds the threshold of CHF 100'000.-. The administrative burden is therefore very limited compared to that of limited liability companies and public limited companies.

The benefits of  sole proprietorship

This legal form is particularly appreciated for its simplicity, but also because it does not require any start-up capital.

It offers total independence during management, since no shareholders or investors are involved in the adventure! The entrepreneur is the sole master on board, and his room for manœuvre is unlimited.

In addition, it is essential to note that sole proprietorships are also at an advantage because they do not suffer double taxation on profits, unlike public limited companies and limited liability companies. Finally, it is not subject to any compulsory control.

The drawbacks of a proprietorship

But beware: it is essential to note that with the sole proprietorship, your personal liability is unlimited.

This liability for possible debts is then binding on your commercial and private assets. In the event of debt, the sole proprietorship can be sued in bankruptcy.

In addition, this status does not allow you to receive unemployment benefits and makes it difficult for you to obtain credit.

As far as accounting is concerned, the sole proprietorship holds its own. You will have to draw up annual balance sheets and must keep accounts, even though this status offers greater flexibility.

General partnership

It is a partnership, consisting of at least two individuals. A general partnership (NPM) is often created by combining two or more natural persons to form a business enterprise. The foundation is simple, since it is established by the signing of a contract between the partners.

All that is then required is registration in the commercial register.

The benefits of a general partnership

Beyond its relatively straightforward creation, a partnership has other advantages that will appeal to you. Since it does not require any minimum capital, it is an interesting choice for partners who wish to set up a business quickly and who do not have great financial means.

The drawbacks of a general partnership

Since a partnership has no legal personality of its own, personal liability is unlimited for each partner who founds it. They must then jointly and severally and personally assume the debts of the partnership. In addition, partners will not be entitled to receive unemployment benefits.

Finally, the last drawback lies in the right of control that each of the founders of the company has in the choices related to the partnership. This can greatly undermine the flexibility of the business, and lead to some disagreements.

The Limited Liability Company

It is one of the most popular legal forms in Switzerland among SMEs and family businesses. Halfway between the General Partnership (Partnership) and the public limited company (plc), its advantages are numerous.

The benefits of a public limited company

Contrary to the partnership and sole proprietorship, the limited liability company does not impose on the founders any personal liability for the debts of the company.

The initial capital required is relatively low, at CHF 20'000.-. On the other hand, the main advantage of this status is that the limited liability company can subsequently be converted into a public limited company without liquidation.

Your company can thus easily evolve: nothing can stop you!

The drawbacks of a limited liability company

The administrative formalities for founding a limited liability company are more comprehensive than for a sole proprietorship.

This is because its creation requires an entry in the Commercial Register and the company must be authenticated by a notarial deed.

But that's not all! You also have to draw up articles of association as well as the convening of a shareholder's meeting and an auditing body under certain conditions.

Here is second point you have to face when opening an LLC : you are subject to double taxation on the partner's yield, income and assets.

On the other hand, everyone has the possibility to consult the bodies, the capital and the shares on the Commercial Register; members' anonymity does not exist, which has to be taken into consideration.

If you are embarking on this adventure and wish to set up a limited liability company, you must understand that the costs involved in managing this status are quite high. You should therefore include it in your business plan!

In addition, LLC managers are not eligible for unemployment benefits unless they leave the company permanently.

Finally, be aware that if you choose this status, it often has less credibility than a public limited company towards creditors, suppliers and customers.

The Public Limited Company (plc)

This capital company has its own legal personality and can be entered into by one or more natural or legal persons. Their contributions to the capital then give the right to shares.

The benefits of the public limited company

Very common in Switzerland, this legal status helps small companies to have access to funds, while preserving founder's responsibility.

Indeed, in the event of indebtedness, the shareholders are only liable for their share of the share capital.

In addition, since employee shareholders are considered employees, it is mandatory they be insured.

Shareholders' anonymity is completely possible, and the company name can be freely chosen.

Finally, this legal status confers real credibility with credit institutions, suppliers and customers. You therefore have more trumps in hand to make your company evolve over time.

The drawbacks of the public Limited Company

The minimum capital to set up a Limited Company is high: you will need CHF 100'000.-.

On top of that, there are the administrative procedures, complex and far-reaching matters.

In addition, you have to submit to double taxation on profits: you will then pay taxes on the return and capital of the corporation, as well as on shareholders' income and assets. In addition to these costs, you also have to pay high management fees: annual reports, costs of shareholders' general meeting, auditors, accounting, etc.

In short, there are many financial points to consider in your business plan!

How to choose your legal status: 5 essential criteria 

When you get to the stage of selecting the legal form of your business, nothing is done at random. A number of criteria must be taken into consideration in order to guide you towards THE solution that suits you. Actually, there is no such thing as a bad status, there are only unsuitable statuses.

So, to help you find your way around and make your choice in any case, here are the criteria you should focus on.

Criterion 1: Capital

You need to find out how much capital you need to start your business. As we have seen, it varies according to the legal form. So, in order to be well organized, it will also be essential to take stock of the funds needed for the first year of operation of your business, but also for the following 3 to 5 years. The objective is not to let yourself be overtaken by the unexpected, in order to perpetuate your business. Your choice must therefore depend on your financial means!

Criterion 2: Risk and responsibility

Again, your choice will depend on your business. The rule is that when the risk associated with your business is significant, you should turn to a private limited liability company or a public limited company, as your liability for the debts of the company is limited.

Criterion 3: Independence

When we talk about independence, we are talking about the scope of the decisions you will make. When you choose to work alone, you will obviously have more leeway than if you decide to include partners or investors in the creation of the business. Sometimes, to make a business sustainable, that's what can make the difference!

Criterion 4: Taxation

Before making your choice, be careful about the tax implications of your status. Depending on the legal form you select, the income as well as the assets of the company and the owner are taxed separately or together.

A limited liability company (both private and public) is subject to double taxation on profits, which is not the case for proprietorships. So be sure to include these amounts in your business plan!

Criterion 5: Social security

Essential when setting up a business, social security is something you need to focus on. Indeed, it makes it possible to cover the entrepreneur and his collaborators against specific risks. Some types of social insurances is therefore compulsory, and others optional, depending on the status you choose. For example, when you set up a sole proprietorship, you do not have unemployment insurance. Joining a pension fund is also optional.

Sole proprietorships and partnerships are fully responsible for their own pension provision. Public limited companies and limited liability companies have to take out all insurance policies.

Conclusion

When choosing your legal status, be careful to weigh the pros and cons! True, there are many parameters to be taken into account when selecting the one that will be ideal for your activity: but with good organisation, you will manage to find the one that perfectly matches your expectations and your means. The stakes are high: the future of your company depends on it! So, have a long-term vision, because that is what will enable you to get your company where you want it to be.

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