Is a special-purpose entity the ideal successor to a business? Succession as a perennial favorite
Current Implementation Options
In practice, both problems are addressed through “institutionalized” successors. Instead of transferring the business to private individuals, it is transferred to a foundation or a holding company. From then on, the company shares are held and managed by the foundation or the holding company. Family members participate through distributions from the foundation or holding company, but no longer directly from the company itself. Bylaws govern the extent of co-determination, the decision-making process, the use of proceeds, membership, and the transferability of membership.
What sounds simple, however, turns out to be quite complex in practice.
In particular, establishing a foundation requires extensive consultation with specialized law firms (at VOELKER & Partner, Attorney Rieger, a proven specialist in foundation law, is available to advise you). A foundation established in perpetuity offers little flexibility in its future management and adaptation; it is also subject to supervision by the foundation authority.
A holding company (as a GmbH or KG) is easier to establish and manage, but it lacks the permanent continuity of a foundation. If disputes arise among the shareholders, individual shareholders may terminate their membership and are then entitled to a severance payment. This not only jeopardizes the company’s success but can also place a significant strain on the company’s liquidity.
Those who wish to use their corporate assets primarily for philanthropic purposes in the future will find a good solution in a foundation, but not in a holding structure, where the allocation of profits depends on the decisions of the shareholders.
There are various prominent examples of succession through an “institution.” Bosch, Würth, or Aldi, for instance, where successful companies were no longer held by the family but were managed through foundations or holding structures. The respective families still hold stakes but have little to no influence on the operational management of the companies.
A New Concept: the GmgV
The Ministry of Justice now claims to have identified a need for a company that combines the respective advantages of a holding company and a foundation. To this end, it presented a concept paper a few weeks ago for a new “company with restricted assets” (GmgV). Since then, the idea has already been the subject of lively discussion.
The GmgV proposes a corporate form that operates without shareholders—and is thus similar to a foundation. The founder may assume management of the GmgV; subsequently, management is selected according to defined criteria.
Since the company has no shares but exists in its own right, shares and management positions are not inheritable. The descendants of the founding generation are thus excluded from any participation in the company. Profits generated are not distributed but remain within the company and are reinvested. The management of the GmgV is to receive only a salary at most in line with market rates, which in turn is capped by further guidelines.
Compliance with these criteria is to be monitored by an authority yet to be specified; here, too, a parallel to the foundation and foundation supervision has been deliberately established.
Finally, the GmgV is also subject to taxation. Corporate income tax is to be levied on the income, similar to a GmbH. In addition, however, inheritance tax is also to apply. This tax, which has previously applied to foundation assets, is levied every 30 years and simulates the transfer of assets to the next generation. As with a foundation, half of the GmgV’s existing assets—after deducting a tax exemption of 800,000 euros—are to be taxed, as if an
inheritance to the next generation had taken place. Depending on the size of the assets, the tax rate can be as high as 30%.
Is the GmgV a suitable successor?
Is the GmgV a suitable succession instrument? Unlike with previously known solutions, the current owner completely relinquishes control of the company upon transfer to the GmgV. While in the case of a foundation or holding company the succeeding generations have at least partial co-determination rights and can exert influence to a defined extent, this is completely eliminated with the GmgV. Due to the non-transferability of the shares and the definition of clear criteria for management, the succeeding generations are excluded. A childless owner may find this structure an alternative to the time-consuming search for a successor. However, those who have built a family business and value the “family” prefix will tend to favor the familiar succession solutions.
Pursuing (also) philanthropic purposes with the proceeds—as many entrepreneurs desire—is not possible with the GmgV. The complete reinvestment of profits creates a closed system that precludes their use for purposes outside the company. This ensures that the GmgV does not become a welfare institution for descendants and simultaneously retains the necessary funds for growth and research; at the same time, however, the scope for structuring and disposing of assets—beyond a focus solely on the company—is significantly restricted.
Against this backdrop, the planned tax regulation is difficult to understand. There is no transfer to subsequent generations. Subsequent generations are also not involved, neither in management nor in the profits. The entire profit is generated solely in the interest of the company, as it remains entirely within it. This secures innovation and jobs, a laudable goal.
It remains questionable, however, why the inheritance substitute tax is intended to skim off roughly one-third of the company’s value every 30 years, based on the assumption of a fictitious generational transition. An entrepreneur willing to keep the company in existence in the form of a GmgV for the sake of the company itself will be more deterred than encouraged by this tax-based “de-growth” from the structuring option.
The planned cap on compensation for key personnel is also likely to cause practical difficulties. As a legal form for a company directly engaged in operations, the GmgV is thus hardly suitable, as it would be at a significant disadvantage in the competition for the best executives. The GmgV is conceivable only as a shareholder company, i.e., in the role of a holding company. Its sole function would then be to exercise shareholder rights in the operating company it holds. The limited scope of its activities in this regard would be compatible with the cap on compensation and comparable to the expense allowance for a board member of a purely charitable foundation.
The bureaucratic burden resulting from the supervision of the company by a specially created supervisory authority also remains unclear.
The concept paper thus provides an interesting basis for discussion—but above all, likely for the discussion of whether a new corporate form is even necessary. Many questions remain unanswered at this stage. Whether the GmgV will actually be established and in what form therefore remains to be seen.
Conclusion: Don’t Postpone Succession Planning
Anyone who wishes to arrange their business succession today and rely on a “perpetual concept” for their company does not have to wait for the GmgV. Specialized teams from various legal fields at VOELKER & Partner are already advising on various possible solutions. For example, by establishing two interlocking GmbHs that mutually hold their own shares and shares of the other company, some of the objectives of the planned GmgV can already be implemented today without risking supervision by a foundation authority or the burden of inheritance substitute tax. We also regularly structure foundation and holding company solutions as succession planning instruments for businesses and private assets. Please feel free to contact us!