Core Concept: “Responsible Ownership”
Responsible ownership means managing future societal challenges in the context of disruptive transformation—such as climate protection and digitalization—through an economy that operates sustainably while not losing sight of the necessary, ongoing corporate realignment. Small and medium-sized enterprises (SMEs) and family-owned businesses are driving this development forward in Germany.
In this context, corporate management guided by long-term considerations should be able to rely on the long-term commitment of capital while maintaining the company’s independence. Those entrusted with managing the company should not be tied to it solely in the short term and should be able to rely on the long-term existence of the business—free from outside influence—to fulfill their duties.
GmbH with Restricted Assets (GmbH-gebV)
The proposed legal form of a GmbH-gebV should ensure, for the sake of sustainable value creation, that the company continues to exist as a “subject” of responsible ownership that is largely independent of the interests and decision-making of the shareholder family.
A defining feature of the GmbH-gebV is a mandatory and irrevocable distribution ban on both current and future shareholders, designed to preserve assets within the business. Even in the event of a shareholder’s withdrawal, that shareholder is to receive only the nominal value of their contribution, but not the fair market value of their share. Profit transfer agreements and profit participation rights are prohibited, as is conversion to corporate forms without asset retention or charitable status.
Aside from issues related to European law and other weaknesses—such as governance or tax loopholes, or the exclusion of capital market investors—the inherent “decoupling” of the corporate sphere from the interests and decisions of the shareholder group is likely to make the GmbH-gebV an unattractive legal form for the majority of family business owners in Germany.
This is all the more true given that, in medium-sized, shareholder-managed businesses, the company and the family are inextricably intertwined—often as part of a “life’s work” philosophy. Shareholders think long-term and view “their” company as the foundation of security—both external (e.g., for their own employees or other stakeholders) and internal (for their own family)—across generations!
If this security function is eliminated, the (family) business owner will look for other suitable solutions that can strike a balance between the common good and property rights.
First Alternative: (Company-Affiliated) Foundation
The first option here is a foundation, which is a legal entity without members.
The primary focus is on implementing the founder’s will, which is primarily manifested in the free determination of the (permitted) purpose of the foundation as set forth in its articles of incorporation. The principle of capital preservation (including with regard to the endowment capital) enables long-term business continuity, particularly in the case of corporate-affiliated foundations, while also guaranteeing cross-generational financial security for the founder and their family, provided these individuals are among the foundation’s designated beneficiaries.
The founder’s freedom to make decisions—for example, regarding grants and the group of recipients, as well as the appointment of members to the foundation’s governing bodies (such as the board of directors)—allows for the foundation to be tailored and adapted to the founder’s family’s life circumstances without difficulty.
Regulatory measures by the foundation supervisory authority are essentially limited, in the case of a private-benefit family foundation established in the interest of the founder and his or her relatives, to verifying compliance with the foundation’s purpose. Business decisions, however, cannot be influenced.
Significant tax advantages—both in terms of income tax and estate tax—can be achieved by establishing a charitable foundation that pursues eligible (e.g., charitable) purposes. This type of foundation is almost entirely tax-exempt, whereas a family foundation, when transferring business assets, can only claim the inheritance tax privileges provided by applicable law and is subject to the substitute inheritance tax every 30 years.
In practice, a “dual foundation” model is often chosen when transferring business assets to foundations. This allows for the largely tax-efficient transfer of the business to a charitable foundation while maintaining the family’s influence in the business through a majority of voting rights held by the family foundation as an additional shareholder.
Second Alternative: Family Pool
Alternatively, the family pool offers the possibility of permanently preserving assets and prevents fragmentation in the event of inheritance when assets are transferred to multiple heirs.
The family pool is created by pooling assets into a company whose legal form can be freely chosen (partnership or corporation) and which can be structured according to the individual asset and shareholder situations in line with the preferences of the founding pool members. Deviating provisions regarding voting rights, ownership rights, and income rights—including those in favor of individual family members (or “deserving” employees)—are permissible and allow for a gradual transfer of assets to the next generation.
Since ownership of the assets remains with the pool members, there is no risk of loss of ownership here—unlike in the case of a foundation, which is an independent owner of the assets. For asset protection purposes, the partnership agreement may also stipulate that only immediate family members—and not, for example, the surviving spouse—shall succeed to partnership status in the event of inheritance.
From a tax perspective, when assets are gradually contributed to the pool, personal inheritance tax exemptions can be utilized, for example. With regard to income taxes, tax benefits such as the real estate tax exemption for the sale of existing properties held for more than 10 years are retained if the family pool is structured as an asset-managing partnership.
The financial security of the pool members is then provided by the income generated from the assets held in the pool. Charitable causes can also be supported as desired through donations or endowments to nonprofit organizations.
Conclusion:
Both a foundation and a family pool allow the (family) entrepreneur to flexibly manage corporate assets and use them profitably—both for the public good and to provide security for themselves and their dependents—in the spirit of a properly understood “responsible ownership.”
