A New Way to Inherit a Business: The Family Foundation
The Family Foundation Act entered into force on 22 May 2023. A family foundation (fundacja rodzinna) provides for the inheritance of an enterprise (business) run by its owner after the owner's death in such a way that it retains its family character.
The Situation So Far
In many cases, when families face the death of a business owner, disputes arise among the heirs (most often the owner's children) and problems emerge with continuing to run the business. Shares are often sold to persons outside the family, as a result of which the business loses its family character. Existing solutions, for example suitably drafting the articles of association of a limited liability company (sp. z o.o.), do not always prove sufficient. The family foundation is a breakthrough in this respect because it creates possibilities that existing legal solutions did not provide.
Setting Up a Family Foundation
A family foundation is set up by the founder (the owner of the business). It may start operating during the lifetime of the business owner or be established in their will, and in each of these cases the founding deed must be drawn up as a notarial deed. Setting up the foundation will also require drawing up its statute. The assets contributed to the foundation to cover the founding fund must amount to at least PLN 100,000. The family foundation will have to be registered in the relevant register kept by the Regional Court in Piotrków Trybunalski. This will be a register separate from the National Court Register (KRS).
Assets to Cover the Founding Fund of a Family Foundation (Contribution)
It is true that an enterprise run as a sole proprietorship (jednoosobowa działalność gospodarcza, JDG), a civil-law partnership (spółka cywilna) or a partnership may be contributed to a family foundation. However, because of the statutory restriction on family foundations carrying on business activity, contributions in this form would be economically unfavourable.
As a rule, the only economically viable contributions to a family foundation can be real estate or shares in a limited liability company, a joint-stock company or a simple joint-stock company. The activity of such a foundation will therefore be limited either to managing real estate or to exercising the rights attached to shares.
Where the aim is to keep in the family a business run as a JDG, a civil-law partnership or a partnership (including a general partnership or a limited partnership), it will usually be necessary to transform it first into a capital company (limited liability company, simple joint-stock company, joint-stock company).
Where the contribution is to consist of shares in a limited liability company or shares in a joint-stock company, the articles of association or statute must first be analysed to check that they do not provide for any restrictions on the transfer of shares.
Operation of a Family Foundation
A family foundation consists of:
- the foundation's beneficiaries
- the beneficiaries' meeting
- the management board of the family foundation
- the supervisory board (mandatory once the number of beneficiaries exceeds 25).
Below we discuss the role of each body in detail.
Beneficiaries
A family foundation (in Polish) will consist of beneficiaries (the "shareholders" of the family foundation). Beneficiaries are persons entitled to benefit from and withdraw money from the family foundation's income. Any person may be a beneficiary (most often these will be close family members), and if the family foundation was set up during the lifetime of the founder, that is the owner of the business (not in a will), the founder may be a beneficiary. Beneficiaries are designated by the founder, and after the founder's death their list may be changed in accordance with the statute of the family foundation. A beneficiary may, but need not, have the right to take part in the beneficiaries' meeting.
Beneficiaries' Meeting
The beneficiaries' meeting is the body that takes the key decisions in a family foundation. At least one beneficiary must be granted the right to take part in the beneficiaries' meeting. This right may of course also be given to all beneficiaries. Because only certain beneficiaries may be entitled to take part in the beneficiaries' meeting, persons not interested in the activity of the business will not paralyse it, since they will be excluded from managing the family foundation and therefore also the business.
Management Board
The beneficiaries' meeting is the body responsible, among other things, for electing the management board of the family foundation. The management board of the family foundation manages the family foundation's assets. In the case of real estate, it may let and lease it. In the case of shares, the management board exercises the rights attached to them. The management board of the family foundation has an influence on the election of the management board of a company whose shares form part of the family foundation's assets and on the distribution of the profit earned by those companies. A management board member may, but need not, be a family member or a beneficiary.
Supervisory Board
A family foundation may have a supervisory board, and if the family foundation exceeds 25 beneficiaries, establishing one will be mandatory.
Statute of a Family Foundation
The detailed rules for the operation of a family foundation are set out in the statute. The statute is also drawn up as a notarial deed. It must specify, among other things, the rules for paying benefits to beneficiaries and the rules for amending the statute.
Persons Outside the Family Cannot Take Over the Enterprise
The beneficiaries of a family foundation are specified by the founder (the owner of the business). A beneficiary's rights are personal and non-transferable, which means that they cannot be transferred to another person. This makes it possible to preserve the family character of the business. Suitable provisions in the statute will secure the succession of such an enterprise for generations without the risk of the founder's achievements being wasted.
Conclusions
The Family Foundation Act creates possibilities that did not previously exist in Polish law. For the first time, a family business can be protected so that it is not sold to persons outside the family. In addition, it will become possible to remove family members not interested in the business and the enterprise from managing it, while preserving their right to draw profits from it.
Setting up a foundation is not a simple process. The first step should be an analysis of the form of business, the situation and the articles of association or statute of the enterprise. If there are no obstacles, or once the necessary changes have been made, the family foundation can be set up. The key element is drawing up the statute. The Family Foundation Act requires the statute to regulate the foundation's activity in great detail. In addition, every entrepreneur's financial, asset and family situation is different, so the provisions of the statute can be drafted so that the family foundation's activity best meets the needs of the business and the family.
