Peter Rawert and Janne Gärtner
Nonprofit Organizations in Germany:
Permissible Forms and Legal Framework
1. Introduction
The so-called numerus clausus (permitted range) of legal forms under
German private law means that only a limited number of such forms is
available to organizations engaged in non-profit activities1. These forms vary
in their degree of appropriacy for the promotion of non-profit purposes.
Unsuitable for non-profit purposes are the partnerships
(Personengesellschaften), that is the partnership under the Civil Code
(Gesellschaft bürgerlichen Rechts - §§ 705 ff. German Civil Code - BGB),
the general partnership (offene Handelsgesellschaft - §§ 105 ff. German
Commercial
Code
HGB),
and
the
limited
partnership
(Kommanditgesellschaft - §§ 161 ff HBG). This unsuitability is due firstly to
the personal liability generally attached to the position as member of a
partnership. Secondly, partnerships fall outside that group of corporate body,
association of persons and body of assets under §§ 51 ff AO (General Tax
Act – Abgabenordnung), which enjoy tax privileges for the pursuit of
purposes in the general welfare. Rather, tax privileged status is denied to
them. The co-operative association (Genossenschaft) is also unsuitable as a
legal form, despite being a corporate body under § 51 s.2 AO. Such
associations operate in the economic interests of their members by means of
common commercial activity and these purposes disqualify them from
recognition as non-profit organizations under §§ 52 ff. AO2. The joint stock
1
2
Non-profit organizations will be taken to include organizations which are formally
structured, are independent of the state and not profit oriented, are independently
administered and financed from private contributions and are not a compulsory association
(Zwangsverband) such as the professional association of lawyers or doctors. This excludes
legal forms of public law such as the public institution (Anstalt) or public law foundation
(Stiftung des öffentlichen Rechts) as possible organizations as their operation is not
independent of state influence.
General welfare or charitable purposes in connection with taxation rules means the activity
of a corporate body which, pursuant to its articles (§ 60 AO) and actual management (§ 59
AO) is oriented towards selflessly promoting the general welfare in material, spiritual or
public policy fields (§ 52 AO). This also includes the pursuit of benevolent (§ 53 AO) or
church (§ 54 AO) purposes.
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Peter Rawert and Janne Gärtner
company (Aktiengesellschaft) will also be omitted from this survey, because
even though it may be formed for any lawful purpose (see § 3 Stock
Corporation Act – Aktiengesetz), and thereby is also available for the pursuit
of general welfare purposes, it is nevertheless regarded as typically oriented
towards the raising of capital on the open market, that is the stock exchange.
As stock exchange trading is fundamentally linked with expectation of profit
(the profit motive), it cannot generally be seen as appropriate for the pursuit
of non-profit purposes.
Accordingly the significant vehicles for non-profit organizations are the
association (Verein), the private limited company (Gesellschaft mit
beschränkter Haftung – GmbH) and the private law foundation (Stiftung des
Privatrechts).
2. The Association (Verein)
The association is subject to federal regulation under §§ 21 to 79 German
Civil Code (BGB). It is a voluntary corporate body of defined duration
representing the joining of several natural or legal persons in a shared wish to
pursue specified common purposes under a collective name. The BGB
distinguishes between associations with and without legal capacity. The
founding of an association requires an informal memorandum of association
(Gründungsvertrag) between at least two persons. Apart from the submission
of written articles of association, a minimum membership of seven persons is
necessary for entry of the association in the register of associations, by means
of which the association attains legal capacity (§ 21 BGB). The name of the
association may be freely chosen by the founding members, provided only
that it is distinct from the names of other local associations and is not
misleading regarding the type, size and other characteristics of the
association. The name of the association may include the word “foundation”,
provided the association is dedicated to the realisation of general welfare
purposes by means of a not inconsiderable body of assets, and that it
indicates its legal form clearly enough to preclude confusion with another
independent foundation.
The association may be formed for any legal purpose and as such is ipso
jure an appropriate vehicle for a non-profit organization. As, so-called
commercial associations (wirtschaftliche Vereine) require official approval
(§ 22 BGB), the dividing line between non-commercial and commercial
associations is a central problem of association law. The obligation to obtain
approval under § 22 BGB, however, generally has no significance for nonprofit organizations. The purpose-driven enterprises (Zweckbetriebe)
occasionally encountered in the non-profit sector – that is enterprises
Nonprofit Organizations in Germany: Permissible Forms and Legal Framework
3
essential to the realising of the charitable purposes of the association – are
not caught by § 22 BGB.
Legal representation of the association falls to the board (Vorstand),
which also conducts its internal affairs. The board may consist of one or
more natural or legal persons and its members need not be association
members. As the highest body of the association, the general meeting of
members has comprehensive powers. It appoints and removes the board, who
it is also empowered to issue both general and specific instructions. While its
powers may be significantly restricted or transferred to other bodies of the
association under the association articles, this does not apply to the
competence of the general meeting of members to dissolve the association by
resolution. The possibility for association members to amend the articles may
also not be effectively excluded or restricted. As a general rule a simple
amendment to the association articles requires ¾ of the votes of members
present, while amendment of the association purposes requires the
unanimous agreement of all members. However, while the articles may
provide for differing majority requirements, they may not exclude members
completely from influencing the decision-making of the association.
The typically large number of association members makes it relatively
difficult to pass resolutions, which in turn leads to a high degree of
dependency on the board. As in large associations in particular, the
monitoring of the board by the members’ general meeting is scarcely
feasible, it is often advisable to create special monitoring bodies (such as an
advisory board, supervisory board, or curatorium). Almost all of the
competences of the members’ general meeting can be assigned to these
monitoring bodies, although their powers may be limited to the supervision
of day to day administration of the association by the board. Generally, the
internal organization of the association may be structured almost at will.
Apart from protection of minorities, only the principle of association
autonomy presents a significant limitation to its structure; an association may
not be subject over time to the will of an association non-member.
Membership of an association is not a right in rem but in personam. The
rights of association members consist in administrative rights and claims on
use of association facilities. Rights of administration include the right to
attend members’ general meetings, to vote, to challenge improper resolutions
and the right to information on association affairs. However, there is no right
to participate in the association assets: members have no rights to either a
severance payment on their resignation or to participation in the proceeds of
dissolution of the association. As an individual right, membership of the
association is neither transferable nor inheritable. It comes into existence
through joining the association, which may be linked to specified
requirements, and generally ends with the resignation or death of the
member. Neither joining nor resignation require a particular legal form and
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Peter Rawert and Janne Gärtner
hence may be effected quickly and without complications; however, the
articles may stipulate varying regulations.
Liability of the association is limited to the association assets. There is
no minimum capital requirement, the association being typically dependent
on levying membership contributions. For the pursuit of foundation
purposes, however, the association needs to be provided with assets through
voluntary contributions (“foundation-like capital provision”). It can be
prescribed in the articles that the level of foundation assets is to be
maintained, although the members may dispense with such a provision by
common consent.
Associations are under a duty to render accounts under §§ 27 s 3, 666,
259, 260 BGB, pursuant to which the board has to present an ordered
summary of income and expenditure and any records.
Apart from official financial monitoring for taxation purposes, the
association is free of state supervision in the conduct of its affairs.
Nevertheless an association may be deprived of its legal capacity if the
number of members falls below three, if it is contrary to the public interest or
pursues commercial objects. An association can also be prohibited if its
purpose violates the criminal law.
The members’ general meeting may by a qualified majority pass a
resolution to dissolve the association. After dissolution of the association the
association assets will be liquidated. The remaining surplus after satisfaction
of creditors will go to “remaindermen” nominated in the articles or by other
association bodies. Where no recipient is nominated, the assets devolve
without liquidation to the state. The association is also automatically
dissolved without liquidation of the assets if all the members resign from the
association.
The association is subject to conversion under the 1994 Conversion Act
(Umwandlungsgesetz). Associations may engage in mergers and splits
(division, splitting off, separation) and in changes of legal form. The
association may only take over the assets of other registered associations as
legal transferee (übernehmender Rechtsträger). On a change of legal form
they are only permissible as form changing entity, but not as the entity of a
new legal form.
Generally speaking, by virtue of its flexible internal organization, its
relative ease of foundation and maintenance as well as the lack of legal
minimum capital requirement, the association may be regarded as the basic
legal form for civic engagement. It is a particularly appropriate legal form
where the unremunerated (honorary) activity of people is more significant
than the application of real resources.
Nonprofit Organizations in Germany: Permissible Forms and Legal Framework
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3. The Private Limited Company (GmbH)
The (private limited) company is an incorporated association with its own
legal personality, in which the members participate in the share capital by
contributing to the extent of initial contributions without being personally
liable for the liabilities of the company. It is regulated by the federal Private
Limited Company Act (GmbH-Gesetz). A company may be founded by one
or more persons. This the so-called one-man company is also admissible.
There is a system of normative provisions for the establishment of the
company. The company articles of association require notarial certification (§
2 s. 1 GmbHG), and they must determine the purpose, the firm and the
domicile of the enterprise as well as the amount of nominal capital and the
amount of contributions of each shareholder. The company exists and attains
legal capacity through entry in the commercial register (§ 11 s 1 GmbHG).
The name of the company may be freely chosen provided that it has the
required designatory effect (Kennzeichnungskraft), that it differentiates from
other local companies and that it does not mislead regarding the legal affairs
of the company. A company may include the term “foundation” in its name
provided that it administers assets dedicated to specified general welfare
purposes and that it clearly designates its legal form by the abbreviation
“GmbH”.
The company is may be established for any lawful purpose (§ 1
GmbHG) and may thereby quality for use as a non-profit organization. In the
case of a so-called foundation company (Stiftungs-GmbH) there must be a
distinction between the charitable purpose (Gesellschaftszweck) and the
object of the enterprise (Unternehmensgegenstand). The charitable purpose
designates the aim of company activity – the advancement of specified
philanthropic or social purposes – which are to be realised with the aid of
activities within the enterprise objects. These activities have to be precisely
described in the articles of association as otherwise the company will not be
recognised as charitable for taxation purposes.
Representation of the company is the role of the managing directors
(Geschäftsführern) (§ 35 s.1 GmbHG). Only natural persons may be
appointed as managing directors of a company. The highest body of a
company is the shareholders’ general meeting, which has comprehensive
powers. It appoints and removes the managing director(s). It monitors the
management and is entitled to set it tasks and to issue it with instructions of a
particular and general nature. It has power to steer the business activities of
the company and to lay down the guidelines and priorities of company policy
down to the detail of specific matters. In this the assembled shareholders can
determine the internal structure of the company virtually at will, in that they
can establish further bodies (including board of governors, committees,
supervisory board) alongside the shareholders’ general meeting. This scope
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Peter Rawert and Janne Gärtner
to structure itself freely is subject only to minority protection and the
principle of the autonomy of associations. A resolution to amend the articles
of association is expressly reserved to the shareholders’ general meeting.
Amendments of the articles require a qualified majority of ¾ of the votes of
shareholders present, whereas a change in the purposes of the company
analogous to § 33 s2 BGB is only possible with the agreement of all
shareholders.
Shareholder rights in a private limited company comprise both
administrative participation rights and property rights. While the
administrative rights (to information, to participation in company meetings,
voting rights, rights of challenge, etc.) are largely obligatory, the property
rights, that is claims to profits and to liquidation assets, are at the disposition
of the shareholders. Thus on the basis of the company articles the
membership may be deprived of its property rights. Out of tax
considerations, therefore, the shareholders of a non-profit company can be
precluded from participating in the profits under the company articles.
Instead the gains from business activities of the company are channelled
exclusively into the charitable purposes laid down in the articles of
association. In the same way the resigning shareholder’s legal entitlement to
a severance payment may be limited under the company articles to the value
of his initial capital contribution. This limitation is required for the
recognition of charitable status for taxation purposes (§ 55 s 1 No 2 AO). It
is legally unproblematic as the shareholder of a non-profit company does not
make his contribution with the aim of making a profit anyway. Thus this
exclusion of a settlement to the full shareholding value does not adversely
affect the economic freedom of the withdrawing shareholder.
The shareholder rights accrue to the respective shareholder. He holds the
company shareholding as a property value and is its owner. As a matter of
principle shareholder rights are freely transferable, although significant
curtailment of powers of disposal often arise from the company articles, in
which for example the assignment is made conditional on a qualified consent
of the other shareholders (so-called restriction of share transferability –
Anteilsvinkulierung). In the interests of legal certainty and clarity, the
assignment of company shareholdings requires notarial certification. While
the inheritability of company shareholdings may not be effectively excluded
or restricted, the company articles may provide for the redemption or
obligatory surrender of inherited shareholdings. Changes in shareholder
composition are relatively complicated because the number of shares in a
private limited company cannot be changed without an increase in capital,
and because the transfer or creation of further shares always require notarial
certification,. Thus the private limited company can only be recommended as
a funding body of a non-profit organization where the shareholders are to
remain constant or change only rarely.
Nonprofit Organizations in Germany: Permissible Forms and Legal Framework
7
The legally prescribed minimum capital requirement of a private limited
company is Euro 25,000. In the interests of creditor protection there are strict
rules of capital raising and maintenance, which partly incur criminal
sanctions. On entry of the company in the commercial register, liability is
limited to the company assets. Before such entry, those dealing on behalf of
the company are jointly and severally liable.
The private limited company has a duty to render accounts under the
commercial regulations for merchants (§§ 238-263, 264-335 HGB). Its
register disclosure derives from § 10 GmbHG and § 15 HGB.
Apart from official financial monitoring for taxation purposes, the
private limited company is free of state supervision in the conduct of its
affairs. The registration court may, however, order the dissolution of the
company under certain circumstances. Apart from legally prescribed
grounds, such as lapse of time or insolvency, dissolution can occur on a
resolution of the shareholders (§ 60 GmbHG). After dissolution the company
assets are to be liquidated. The proceeds of liquidation are in principle to be
distributed to the shareholders, but for taxation reasons the shareholders of a
non-profit company receive only the value of their initial contributions (see
above). The articles must nominate a certain tax privileged recipient of the
remaining liquidation assets (§§ 61 s1, 55 s1 No 4 AO).
Almost all forms of conversion are admissible in principle for the private
limited company. It can engage in mergers and splits either as legal transferor
or transferee. In a change of legal form it can be the form changing legal
entity or the legal entity of a new legal form.
Because of the relatively close association with the person of the
shareholder and the high degree of flexibility in its internal structuring, the
private limited company is the ideal legal form for initiatives dependent on
the contribution of capital from a small group of private initiators, that is for
the organization of a small, stable group of persons who at the same time put
up capital.
4. The Foundation
The characteristic model for the foundation under German law is the private
law foundation (Stiftung des Privatrechts - §§ 80-88 BGB). It is defined as an
organization with an independent legal personality, which pursues specified
purposes determined by a foundation charter (Stiftungsgeschäft) with the aid
of permanently endowed assets donated for the purpose. The foundation has
no personal owner. It is a purely administrative organization independent of
natural or legal persons. Its third party beneficiaries have no member status
but are simply usufructuaries of the foundation assets.
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Peter Rawert and Janne Gärtner
The private law foundation is primarily subject to the provisions of §§
80-88 BGB, although they in essence regulate only three aspects of the
foundation with legal capacity: the legal nature and consequences of
foundation charter (Stiftungsgeschäft), certain property law issues as well as
the nature of the foundation as legal entity (Rechtssubjekt) and its
participation in general legal transactions. All other questions, such as
approval procedure, supervision of the foundation or the compulsory
requirements of the foundation statutes (Satzung) are regulated under state
(Land) law. In view of the variations in legal treatment of foundations across
the “Länder” and the resulting problems (e.g. forum shopping), fundamental
reform in terms of unification of the civil law position is currently under
discussion.
The foundation with legal capacity (rechtsfähige Stiftung) comes into
existence with the establishment of the foundation charter and state approval
according to the provisions of Land law. The foundation charter
(Stiftungsgeschäft) may be an act inter vivos or mortis causa. Its substantive
content is the establishment of an independent legal personality for a
specified purpose and its endowment with specified assets. The minimum
federal requirements of the foundation charter are the determining of the
purpose, the property endowment, the domicile, the internal bodies, and the
name of the foundation. State approval constitutes legal capacity. The issuing
of approval is based on a concessionary system. Administrative approval of
the foundation is binding and a claim arises for the granting of approval on
due fulfilment of all substantive requirements of the BGB and Land law. On
granting of approval, the foundation is permanently released from the
founder and gains an independent legal claim to the property designated in
the foundation charter. Where the founder has made the foundation his heir,
the designated property is transferred to the foundation under universal
succession (Gesamtrechtsnachfolge - § 1922 BGB).
While the foundation is required to bear a name, the founder is subject to
almost no legal restrictions when making his choice. No indication regarding
the legal form of the foundation is necessary.
The founder is largely free regarding the substantive formulation of the
foundation purpose. This derives conversely from § 87 BGB under which
purposes are only impermissible when counter to the general welfare, that is
counter to the law and actually or legally impossible (principle of all-purpose
foundation conforming with public interest). According to the dominant
view, foundations are conceptually excluded and so impermissible whose
purposes consist in the maintenance of the founder (“foundation for the
founder”) or whose purposes are confined to the administration of the their
own property (“foundation as an end in itself” -Selbstzweckstiftung).
There is doubt regarding the permissibility of company-linked
Nonprofit Organizations in Germany: Permissible Forms and Legal Framework
9
foundations (unternehmensverbundene Stiftungen), that is foundations which
directly or indirectly operate a company. Aside from questions of their
commercial suitability or desirability from the public policy viewpoint, the
dominant opinion regards them as lege lata permissible without restriction. A
minority of legal scholars, however, is of the opinion that the indissoluble
binding of a foundation to an enterprise with no concrete relation to the
foundation purpose should be prevented, so as to ensure that the pursuit of a
philanthropic purpose is not permanently subordinated to counter-foundation
(company) interests.
The admissibility of the purely family foundation, exclusively serving
the maintenance of the founder and his family, is also controversial. The
grounds for its establishment often derive from the founder’s wish to prevent
the splitting of his property on succession, or alternatively in the endeavour
to preserve a family business and to secure its continuation. Doubts regarding
its qualification for approval arise out of the law of succession, in particular
the prohibition of infinite execution of a will. In addition its non-compliance
with the prohibition on entailed estates is also pointed to, itself based on a
value judgement against the revival of feudal structures. In practice there is
some reluctance to grant approval to family foundations.
As a purely administrative organization, the foundation has no owner but
owns and administers itself. Under federal law only one body is required,
that is the board, which has rights of legal representation of the foundation. It
is solely responsible for running the foundation, although it is significantly
bound by the wishes of the founder as laid down in the foundation
constitution. As the foundation board is subject to no further control, apart
from the purely legal regulation of state supervision, and in most cases
perpetuates itself through co-option, it enjoys a relatively high degree of
independence. The formation of further, optional bodies (board of governors,
consultative bodies, supervisory board, etc.) is however permissible and
customary. The tasks of these bodies can consist particularly in the
monitoring of the board and in ensuring that the founder’s wishes are
observed. The demarcation of roles between the individual bodies is entirely
a matter for the founder. His organizational competence is thereby restricted,
in that foundation bodies may not be accorded true corporate powers in the
sense of independent decision-making. The granting of such powers would
lead to a confusion between the legal form of a foundation and that of the
corporate body, as such irreconcilable with the numerus clausus of legal
forms (permitted range) in private law.
There are no membership rights in the foundation analogous to those in a
company or association. Rather than members, the foundation has only
beneficiaries (Destinatäre), who may be granted administrative or
participatory rights as well as actionable rights to foundation benefits
(Leistungen). Nevertheless, as explained above, the foundation constitution
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Peter Rawert and Janne Gärtner
may not grant the beneficiaries quasi-corporate decision-making powers.
Whether the designated recipients can enforce claims against the foundation
will be determined in the constitution. In the normal case no actionable
entitlement to foundation benefits will be granted as this would prejudice
recognition of the foundation’s non-profit status.
The liability of a foundation is limited to the extent of the foundation
assets. Even if there is no legally prescribed minimum capital amount,
disposal over assets is a quintessential feature of the foundation. It is
necessary that the foundation has sufficient assets to enable it to pursue and
fulfil its purpose consistently over time and from its own resources. The
creation of the requisite purpose/resources relationship affords the approving
authorities a degree of discretionary judgement on the substantive level. In
the economic and politico-legal debate the so-called income foundations are
regarded critically. These involve foundations which finance themselves not
from the proceeds on their asset stock, but primarily from current
contributions from public sources (öffentliche Haushalte). The criticism
directed against this format is that the dependence of a foundation from such
contributions constitutes an infringement of the principle of foundation
autonomy.
Foundations are under an obligation to render accounts under the rules
of association law, subject to regulatory variations in Land law. Where they
exhibit commercial characteristics, foundations are obliged to render
accounts according to commercial law principles (§§ 238-263 HGB). There
is no registration disclosure for foundations comparable with commercial or
association law. The registers of foundations kept in some Länder enjoy no
irrebuttable presumption of accuracy. The introduction of a federal
foundation register with this presumption is being discussed in the context of
civil foundation law reform.
Foundations are subject to state supervision (legal control) under the
provisions of Land foundation laws and the monitoring of the taxation
authorities. In cases of impossibility of fulfilling purposes or endangering the
general welfare through the pursuit of foundation purposes, the competent
authorities can under Land law amend the purposes of the foundation or
suspend it (§87 BGB). On its dissolution the regulations on the liquidation of
associations apply correspondingly. In addition it is possible under Land law
to merge foundations with each other. Besides this it is possible for the
internal foundation bodies to amend the purposes and charter as well as pass
suspension and merger resolutions. These rights can be based on Land law or
on the constitution of the foundation. However, it is impermissible in this
context to leave the decisions on such measures to the discretion of the
foundation bodies. As quasi-corporate decision-making in the foundation is
impermissible, regulations pertaining to the abovementioned matters have to
be substantively framed in detail by the founder himself. The foundation
Nonprofit Organizations in Germany: Permissible Forms and Legal Framework
11
constitution can in addition lay down fixed dates for the duration of the
foundation, although as the founder usually aims for as long and unlimited
period as possible, such limited-duration foundations are extremely rare.
Otherwise the general rules is that a foundation is created in perpetuity.
In cases of conversion, foundations are only splittable legal entities and
as such only admissible as transferring entities in the context of a separation
(Ausgliederung).
The foundation would appear to be the most suitable legal form for nonprofit organizations characterised by a particularly long-term purposes,
which are able to pursue their purposes by means of the direct application of
or the proceeds from a specified body of assets.