Using a practical case study, the advantages of converting a sole proprietorship or partnership into a legal entity are illustrated. The possibilities for optimizing taxes, social security contributions, and personal liability are highlighted. In addition, the benefits in the context of a prolonged economic downturn caused by COVID-19 are explained.
Self-employed individuals are subject to a high tax burden based on their reported annual profit. In addition, social security contributions must also be paid on this basis. Compared to corporations, the scope for optimization is relatively limited. In the case of legal entities, the base salary can be determined more flexibly. Furthermore, a bonus or a tax-advantaged dividend can be individually determined when preparing the annual financial statements.
Through profit retention, dividend payments can be postponed to a later date, allowing private tax liabilities to be planned more effectively. Given the challenging economic situation caused by COVID-19, taxpayers should, whenever possible, aim to reduce their tax burden while simultaneously strengthening reserves and the company’s financial substance.
A conversion is tax-neutral, meaning that all hidden reserves in the balance sheet items are transferred to the legal entity through a contribution in kind. No issuance tax (stamp duty) is incurred. It should be noted that the sole proprietorship or partnership must have existed for at least five years, and the amount of share capital must not exceed one million Swiss francs.
Another advantage is the possibility of a tax-free capital gain in the event of a later sale of the converted company. Furthermore, the conversion also initiates the process of business succession planning. In this context, a five-year restriction on the sale following the conversion must be observed.
As part of the overall concept, occupational pension solutions can also be individually structured.
It is also worth mentioning that the joint liability associated with sole proprietorships and partnerships is eliminated, and taxes on liquidation profits are no longer applicable.
We would be pleased to demonstrate a comparative calculation based on a practical example. For a tailor-made solution, we are happy to assist you with our advisory services.