What does small business mean in Switzerland? This article highlights the characteristics, advantages, disadvantages and taxation of small businesses.
The dream of owning their own company, enjoying entrepreneurial freedom and realising their personal ideas motivates many people in Switzerland. However, the thought of complex start-ups and high capital costs often deters them. This is exactly where small businesses offer an ideal and simple way to become self-employed. It is the most common route for freelancers, tradespeople and consultants to take their first steps as entrepreneurs.
First, an important clarification is necessary: the term ‘small business’ is not an official legal form in Swiss law like a limited liability company (GmbH) or a public limited company (AG). Rather, it is a colloquial term that describes self-employment, usually carried out by a single person with low risk and manageable turnover.
From a legal perspective, a small business is almost always a sole proprietorship. The decisive factor that often defines a sole proprietorship as ‘small’ is its annual turnover. The most important threshold here is CHF 100,000. Below this turnover, simplified administrative regulations apply, particularly with regard to entry in the commercial register and VAT liability.
If you set up a small business as a sole proprietorship, it has clear characteristics. As the owner, you are the only person who runs the business. There is no separation between your private assets and the business assets. This leads directly to the most important and at the same time most risky feature: unlimited liability. You are liable for all business debts not only with your business assets, but usually also with your entire private assets. In return, no minimum capital is required by law to set up the business. The name of the company must contain your surname. Additions such as ‘Max Muster, Marketingberatung’ are possible and recommended.
Choosing a sole proprietorship as the form for your small business has significant advantages. Setting up a sole proprietorship is straightforward, quick and extremely inexpensive, as in many cases no notary and no expensive commercial register entry are required. You have full entrepreneurial control and freedom of decision without having to consult with partners or a board of directors.
Depending on your turnover, accounting can be simplified and there is no obligation to use double-entry bookkeeping for turnover below CHF 500,000. Another significant advantage is the tax treatment, as there is no double taxation of company profits and private income, as can be the case with a limited liability company (GmbH).
However, these advantages are offset by disadvantages that must be carefully considered. The aforementioned unlimited personal liability is the biggest risk. Business failures can have a direct impact on your private financial existence. Financing options are often limited, as banks are more cautious when granting loans to sole proprietorships and no shares can be sold to investors. The close link between the company name and your person can limit anonymity, and selling or arranging succession for the company is often more difficult than with a corporation.
How do you set up your small business? The process is refreshingly pragmatic. Formally, your sole proprietorship exists from the moment you start your self-employed activity. However, the following administrative steps are essential.
Step 1: Recognition by the AHV compensation office
As a self-employed person, you are responsible for your own social security contributions (AHV/IV/EO). You should therefore register with the compensation office responsible for you. They will check various criteria to determine whether you are actually considered self-employed. These include operating under your own name, acting on your own behalf and bearing your own economic risk. Ideally, you will already have your first orders or invoices to prove your activity.
Step 2: Entry in the commercial register (if necessary or desired)
Entry in the commercial register is only mandatory for sole proprietorships with an annual turnover of CHF 100,000 or more. However, many founders opt for voluntary registration even if they are below this threshold. This has the advantage that the company name is protected at the company's registered office and the company appears more professional and credible to customers, suppliers and banks.
Step 3: Register for value added tax (VAT)
The obligation to account for value added tax also only begins once your annual turnover exceeds CHF 100,000. If your turnover is below this threshold, you are not liable for VAT. This simplifies your accounting considerably. However, please note that in this case you cannot deduct input tax on your own purchases and investments. Voluntary registration may be worthwhile if you are making high initial investments or if you mainly have business customers who can deduct VAT themselves.
The start-up costs for a small business are minimal. If no compulsory entry in the commercial register is required, setting up a business is basically free of charge. Voluntary registration costs a few hundred pounds. The running costs mainly comprise your AHV contributions, which are calculated as a percentage of your income, as well as costs for any bookkeeping, a business account and necessary insurance such as professional liability insurance.
The taxation of a small business is a key issue that often raises questions. As there is no legal separation between you and your business, there is no separate business tax. The profit you make from your small business is added to your other private income (e.g. from part-time employment or your spouse's income). You declare this total income in your personal tax return. You then pay the regular income tax to the federal government, canton and municipality. At the same time, your business assets (e.g. bank balances, machinery) are taxed together with your private assets as your total assets.
In Switzerland, a small business in the form of a sole proprietorship is an excellent and unbureaucratic way to take the step into self-employment. The advantages of simple establishment, full control and tax simplicity are compelling. On the other hand, the biggest risk is unlimited personal liability. Careful consideration of these aspects, good planning and knowledge of the administrative steps involved with AHV, the commercial register and value added tax are the key to a successful start. This will turn a good idea into a solid foundation for your entrepreneurial future.
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