Definition and legal basis:

A foundation is a legally independent organization that serves to permanently pursue a purpose defined by the founder with the help of assets. It is a legal entity under private law and is regulated in Germany by Sections 80-88 of the German Civil Code (BGB) and by the foundation laws of the federal states.

Foundations are characterized by three essential elements:
1. The purpose of the foundation
2. The foundation’s assets
3. The foundation organization

Unlike other legal entities, foundations have no owners, shareholders or members. They are set up in perpetuity and are usually irrevocable.

Types of foundations:

There are different types of foundations, which can be distinguished according to their purpose, legal form or function:

1. according to purpose:
– charitable foundations
– private foundations (e.g. family foundations)

2. according to the legal form:
– Foundations with legal capacity
– Foundations without legal capacity (trust foundations)

3. according to function:
– grant-making foundations
– operating foundations
– mixed forms

Foundation and recognition:

The establishment of a foundation with legal capacity requires:

1. a foundation deed that documents the founder’s intention
2. A foundation charter that regulates the purpose, assets and organization
3. Sufficient foundation assets to permanently fulfill the purpose
4. State recognition by the responsible foundation authority

Recognition is granted if the foundation’s purpose does not endanger the common good and the permanent fulfillment of the foundation’s purpose appears to be assured. After recognition, the foundation is subject to state foundation supervision.

Organization and administration:

The typical organizational structure of a foundation includes

1. the Executive Board: manages the business and represents the foundation externally.
2. the Board of Trustees or the Foundation Council: an optional body that advises and monitors the Executive Board.
3. other bodies such as advisory boards or specialist committees, if applicable.

The foundation bodies are bound by the founder’s will as set out in the articles of association and must preserve the foundation’s assets and use the income for the foundation’s purpose.

Asset management and fulfillment of purpose:

The foundation’s assets must be preserved (principle of asset preservation). Only the income from the assets may be used for the foundation’s purpose. Asset management must be secure and profitable, whereby the specific investment strategy depends on the purpose of the foundation and the size of the assets.

The purpose can be fulfilled through various activities, such as:
– Awarding of grants
– Implementation of own projects
– Awarding of scholarships or prizes
– Operation of facilities (e.g. museums, hospitals)

Tax aspects:

The tax treatment of foundations depends largely on whether they are recognized as charitable:

1. charitable foundations:
– exemption from corporation and trade tax
– possibility of receiving tax-deductible donations
– tax benefits for donations to the foundation

2. private-benefit foundations:
– subject to regular taxation
– no tax advantages for donations

Particular attention must be paid to compliance with the tax requirements for non-profit status, especially the timely use of funds and the preservation of assets.

Advantages and disadvantages of foundations:

Advantages:
– Long-term safeguarding of a specific purpose
– Tax advantages with non-profit status
– Independence from members or shareholders
– Possibility of sustainable social design

Disadvantages:
– High start-up costs and minimum capital requirement
– Limited flexibility due to the commitment to the founder’s will
– State supervision and control
– Challenges in asset management in low-interest phases

Current developments and trends:

1. increasing importance of consumer foundations, which are allowed to use up their assets over a certain period of time
2. greater professionalization in foundation administration and management
3. growing importance of community foundations and joint foundations
4. increased use of impact investing to achieve the foundation’s purpose
5. digitalization in foundation work and new forms of online fundraising

Summary:

Foundations are an important instrument for the long-term pursuit of charitable or private-benefit purposes. They offer the opportunity to use assets permanently for specific goals and to have a formative effect on society. Establishing and managing a foundation requires careful planning and administration, but also offers considerable structuring options and potential tax advantages. At a time when long-term and sustainable commitment is gaining in importance, foundations are playing an increasingly important role in society and complementing government and private sector activities in many areas.