Foundation and association – Part 1: the non-profit association

Anyone thinking about getting involved in society – possibly together with others – must decide at some point what legal form this should take.

If you want to set up a non-profit organization (NPO), you can use the usual legal forms from company law (GbR, GmbH, etc.). However, a cooperative, a foundation or a registered association may also be the right choice. However, certain legal forms, especially associations and foundations, can enjoy tax advantages. The prerequisite is that the tax office recognizes the organization as non-profit.

The two most important organizational forms for non-profit organizations are the charitable foundation and the non-profit association. In this Part I, we present the non-profit association as an option for founding an NPO.

The (registered) association

The association, in which natural and legal persons can join together, is extremely popular in Germany. Association law is regulated in a separate section of the German Civil Code (BGB, §§ 21 ff.). However, not all associations are the same: The law on associations distinguishes, among other things, between a registered association (“e. V.”) and associations that are not entered in a register of associations.

Important! When it comes to the non-profit status of an association, it makes no difference whether an association is entered in the register of associations or not: even a non-registered association can be granted non-profit status.

However, for liability reasons in particular, it makes sense to have an association entered in the register of associations – regardless of its non-profit status. This is because only the registered association itself has legal capacity and can therefore, for example, conclude contracts and create its own assets.

In addition, entry in the register of associations is a prerequisite for liability privileges in accordance with Section 31 a of the German Civil Code (BGB) for members of executive bodies such as board members: Board members of a registered association who receive less than EUR 840 per year are only liable for gross negligence and intent.

Please note! A registered association requires at least seven members. In addition, only a registered association has mandatory bodies: the board of directors and the general meeting. The board of directors is responsible for the management and administration of the association and represents it externally. Other bodies, such as a treasurer or advisory board, can be provided for in the articles of association.

But even if the executive bodies of an e. V. enjoy liability privileges, the same applies to tax issues in particular: Board members should protect themselves with external professional tax and legal advice! Missteps in the area of tax law in particular entail liability risks, as tax authorities sometimes interpret the concept of gross negligence generously here.

Non-profit status: above all tax advantages

Associations are considered charitable if their purpose is geared towards the common good: A non-profit association must selflessly promote the general public in spiritual, material or moral terms (Section 52 of the German Fiscal Code (AO)). It must expressly state and actually pursue at least one of the purposes listed in Section 52 AO in its articles of association, including

• Sport,
• nature conservation & animal welfare,
• art and culture,
• equal rights for women and men,
• international understanding,
• science and research
• education and
• refugee aid.

Please note! The charitable purpose must be explicitly stated in the association’s articles of association, as must specific measures to implement the purpose! It is important to formulate this precisely in order to benefit from the privileges of non-profit status.

If the non-profit status is recognized by the tax office after a corresponding application, this primarily has tax advantages (§§ 51 ff. AO). Non-profit associations

• do not pay trade and corporation tax,
• pay a reduced VAT rate of 7%,
• have the option of issuing donation receipts / donation receipts,
• have better opportunities to receive funding, and
• can pay tax-free expense allowances to active employees, for example.

However, in order to enjoy these benefits, an association must also meet strict requirements: Income from the association’s activities may only be used for the association’s statutory purposes and therefore may not be used to build up the association’s assets, for example. This is also checked by the tax office at regular intervals.

Please note! However, the aforementioned tax privileges do not apply without restriction even if the organization is recognized as a non-profit organization. If, for example, a commercial business operation is (also) maintained, it must be carefully checked whether the income from this area is taxable. Only if it is a so-called special-purpose operation for the association is this not a problem. If in doubt, professional advice should definitely be sought.

What are the advantages of an association compared to a foundation?

An association has a number of advantages, especially in relation to the establishment of a foundation – even if at least seven people are required to establish an association and not one person, as is sufficient for foundations.

The advantages of the association include

• An association only requires a small amount of initial assets. This is not the case with a foundation: it usually requires large initial assets of ideally at least EUR 1 million; in the case of a trust foundation, around EUR 25,000 is sufficient.
• The establishment costs are low, so a quick start is possible. The foundation is different: a recognition procedure with the foundation authorities is required.
• A change of legal form is possible for an association, but not for a foundation.
• The ongoing administrative costs for the association are relatively low. The foundation usually incurs higher administrative costs, as the tax authorities can demand that annual financial statements are audited externally, among other things.
• The association has no obligation to preserve assets, as no initial assets are required. The situation is different for foundations, where only income from the basic assets may be spent and the basic assets must be maintained in the long term.

Other legal forms for charitable purposes 

However, the non-profit association and the non-profit foundation are not the only legal forms that are suitable for the establishment and operation of an NPO.

Especially if the organization does not exclusively pursue charitable purposes, but is also commercially active in order to finance the charitable purposes, it may make sense to choose a hybrid legal form. An example of such a legal form is the non-profit GmbH (gGmbH) or its little sister the non-profit entrepreneurial company (gUG). Even a public limited company (AG) can be non-profit. Last but not least, a cooperative can be the right legal form for an NPO in which the members pursue social goals together.

There is also another option: setting up several companies with different legal forms can also make sense in certain constellations. For example, founding an association for the actual charitable purpose and a subsidiary (e.g. GmbH) in order to outsource certain areas and benefit from a limitation of liability.