Family company vs. family foundation

When it comes to long-term planning for the transfer and protection of family wealth, many families face an important decision: should a family-managed company or a family foundation be set up?

Both legal forms offer advantages in terms of asset succession, protection and management, but they also have significant differences. This article highlights the similarities and differences between these structures and is intended to help you decide which model is best suited for long-term asset planning.

What is a family company?

A family asset management company is a company form that is specifically established to manage and secure a family’s assets. Typical legal forms are, in particular, the civil-law partnership (eGbR) or the limited partnership (KG). Its primary purpose is not operational business activity, but the long-term management and growth of assets such as shareholdings, real estate, art collections, securities or other investments. The shareholders are usually members of the family who, through this legal form, want to combine and protect their financial interests and plan for the future.

What is a family foundation?

In contrast to a family company, a family foundation is a separate and independent legal entity that manages the family assets and continues to exist beyond the lifetime of the founders, in order to continuously benefit the family members who are the beneficiaries. The purpose of a family foundation (the so-called foundation purpose) is to preserve the assets permanently and to use them for certain family purposes (health, economic security, etc.). The foundation has no ‘owners’ in the conventional sense, but is managed by a foundation board. The founder – often the head of the family – determines in the articles of association how the assets are to be used and what objectives are to be pursued.

Advantages of a family-owned company

• Flexibility: The structure can be flexibly adapted to the family’s needs, for example by amending the articles of association or redesigning the shareholder roles.
• Family-internal administration: As the family generally works together as shareholders, decisions can be made jointly.
• Profit distribution: Profits are distributed according to the shareholders’ shares, which is often perceived as fair. If desired, this can be deviated from under certain conditions.
• Simple inheritance: Shares in the company are inheritable, which facilitates succession within the family and allows for an optimal succession plan.

However, this flexibility also brings challenges. Family-owned companies are prone to conflict, especially when opinions differ on the long-term ownership of assets or the distribution of profits. What’s more, succession planning can complicate the process of maintaining the company, especially for large families with many heirs.

Advantages of a family foundation

• Long-term protection of assets: Dissolving a foundation is subject to strict conditions, i.e. the assets are protected from being broken up and are preserved over the long term.
• Tax advantages: Family foundations enjoy tax privileges, which supports the long-term preservation of wealth.
• Clear rules for descendants: Since the statutes contain clear guidelines for the use of assets, their use and objectives are clearly defined and less prone to conflict.
• Protection from debts and creditors: The foundation’s assets are protected from attachment by creditors of family members because it is legally independent.

One disadvantage of the family foundation is its limited flexibility. As soon as the foundation has been established, the articles of association can only be adapted under strict conditions. Furthermore, it should be noted that in the case of a family foundation, the so-called inheritance tax falls due every 30 years, in which a death is simulated and taxes are incurred accordingly.

Differences between family companies and family foundations

1. Legal nature and purpose

A family company is a form of company that offers greater flexibility in terms of structure and decision-making, as the shareholders can directly influence the management. A family foundation, on the other hand, is a foundation with legal capacity that has a long-term binding purpose, which can only be changed under certain conditions after it has been set up.

2. Flexibility and control

In a family company, the shareholders, who are usually family members, can be directly involved in decisions regarding the management and use of assets. In the case of a family foundation, decisions are made by the foundation board, which represents the interests of the beneficiaries (family members), without them being directly involved in the decision-making process.

3. Retention and use of assets

The assets of a family-owned company can, within legal and corporate limits, be distributed to the shareholders or redeployed in other investments to achieve the family’s goals. The assets of a family foundation are permanently assigned to the foundation and may only be used to support the beneficiary family members within the scope of the foundation’s stated purpose. It is also possible to redeploy the assets here.

4. Tax treatment

A family-owned asset management company is not taxed itself; rather, taxation takes place at the shareholder level. Profit distributions to shareholders are therefore subject to income tax (at the shareholder’s individual tax rate). In addition, family-owned asset management companies are usually exempt from trade tax because they are not commercially active. A change in taxation would only result if the company’s purpose were changed. In terms of gift and inheritance tax, a family company is not a tax-saving model. However, the high degree of flexibility in the transfer of shares means that succession can be planned in such a way that the allowances can be utilised to the day.

Once the foundation has been recognised, it is subject to corporate income tax. Trade tax is only due if it is commercially active, which is not usually the case. When a family foundation is set up, the tax class for the contribution of assets to the foundation is determined by the relationship of the most distant beneficiary to the founder according to the statutes. This also applies if the beneficiary has not yet been born at the time of the foundation’s establishment. Depending on the family relationship, the tax-free allowance is between €20,000 and €500,000, the tax class is I-III and the tax rate is 7-50%.

No land transfer tax is due if a domestic property is transferred to the foundation.

When the beneficiaries receive payments from the foundation, final withholding tax is due, since the recurring payments are generally income from capital assets.

5. Durability and independence

A family company may, depending on its legal form and the shareholders’ agreements, continue to exist beyond the lifetime of its founders, but its durability and independence can be affected by changes in shareholders or shareholder conflicts. A family foundation is by definition a permanent, independent legal entity that exists independently of the lifespans of the founders or beneficiaries in order to fulfil the foundation’s purpose over the long term. To maintain the foundation’s independence, the members of the foundation board should be chosen carefully.

Similarities between family-owned companies and family foundations

Despite their differences, family companies and family foundations also have important similarities:

• Long-term protection of assets: Both models serve to secure the family fortune and preserve it for generations.
• Joint approach: In both the family company and the family foundation, the focus is on the joint use of the assets – whether through joint management in the company or through the defined foundation purposes.
• Succession planning: Both structures offer mechanisms for ensuring succession. In the family company, this is done by transferring the shares in the business; in the foundation, it is done by permanently earmarking the assets for a specific purpose.
• Protection against fragmentation of assets: Both structures are designed to preserve the assets as a unit and not to fragment them through inheritance or sale.

When should you choose one model over another?

Family business:

Suitable for families who own indivisible assets but want to transfer these fairly to the next generation, while preserving and pooling the assets together. A family company offers more flexibility and can be more easily adapted to the family’s needs. It makes sense if the family wants to regularly decide on the use of the income.

Family foundation:

It is ideal for families who want to preserve their wealth securely and in the long term and who can do without flexibility. A foundation is particularly suitable for wealthy families who want to ensure that their capital remains protected for generations and is used for specific purposes, such as the education of their descendants or to support charitable projects.

Conclusion

Family companies and family foundations offer different ways of preserving family wealth. While family companies are characterised by flexibility and collective decision-making, family foundations stand for long-term asset protection and clearly defined purposes of use. The question of which model is better suited depends on the family’s objectives, asset structure and long-term planning. In the end, it is often a question of priorities: flexibility and co-determination or security and protection against fragmentation.

We would be happy to help you decide on and organise your family company/foundation. Your personal points of contact: