Following on from the first part of our blog series, this part analyses the corporate law aspects of family enterprises in Germany. Family enterprises place quite particular demands on the decision regarding the legal form, governance structure and the exercise of economic and administrative rights.
The "right" legal form
In Germany, those who have the choice are spoilt for choice. Family enterprises and their founders have a variety of legal forms at their disposal, from partnerships to corporations. From the perspective of the founders and entrepreneurs, a family-owned business must, in addition to having the most efficient tax structure possible, guarantee the constant enforceability of family interests, the greatest possible freedom of organisation within the enterprise and limited liability as regards external matters. What's more, it must also allow flexible structuring when it comes to succession.
In practice, family enterprises in Germany are dominated by GmbHs and GmbH & Co. KGs. The main incentives for choosing a GmbH are clear limitation of liability to the company's property and very flexible structuring options in the articles of association. The GmbH & Co. KG has the advantage of allowing separation of ownership and management: While the GmbH assumes personal liability, economic decisions remain with the family of the limited partners. If access to the capital market is desired, the stock corporation and the partnership limited by shares come into play. So although there is no "right" legal form for family-owned businesses in general, there is certainly the "right" legal form for each family enterprise and each family.
Considered governance structures
Governance structures are also of key importance for family enterprises. These are rules, corporate bodies and processes that structure the management and control of the company. These governance structures are shaped both by the tension between the family, ownership and corporate management and the intention to ensure sustainable growth, to establish clear decision-making channels and to create a balance between the family and the enterprise.
Typical elements include the establishment of a supervisory or advisory board that advises and oversees the management, and the decision on the internal structure of the management, i.e. who is authorised to do what with whom. In addition, rules of procedure should be considered that regulate the relationship between management and shareholders or partners, for example when it comes to the binding involvement of the entrepreneurs in key management decisions. Careful consideration of formal governance is essential in order to create a structure that is acceptable to all family members but also practical to implement.
However, it may also be worth considering a "legally non-binding" family constitution to establish values and role allocations within the family and thus build a bridge that links the three points of tension, i.e. family, ownership and corporate management.
Clearly defined governance can avoid conflicts, professionalise corporate management and ensure the long-term independence of the family enterprise.
Fair economic shareholder or partner rights
An important criterion for family entrepreneurs is entrepreneurial success, measured by the generation of profits. In their position as shareholders or partners, family members participate directly in the profits generated by the enterprise. Within the interrelationships of a family, it is essential that these shareholder or partner rights are distributed fairly – and possibly independently of the operational role of the individual family member. In particular, this includes an appropriate entitlement to shares in profit, clear rules on withdrawals and transparent access to information on the enterprise's financial situation. A fair organisation of shareholder or partner rights strengthens trust within the family and prevents tensions between active and passive shareholders or partners.
Depending on the founders' motivations and the structure of the articles of association or partnership agreement, it may also make sense not to distribute profits in full, but to retain them for planned investments or as part of a cross-generational asset strategy, for example. It is always important to define a transparent distribution policy and criteria for any reinvestments in order to avoid conflicts from the outset.
Balanced administrative rights of family entrepreneurs
In addition to the profit component, the issue of control is also critical for family entrepreneurs. As a rule, the fortunes of the enterprise should be controlled by the family, who should have administrative rights and – to varying degrees – participate in the corporate management. The management of the enterprise may be performed by way of passing resolutions in the shareholders' or partners' meeting attended by the family members. In such cases, 'golden shares' or special veto rights, which grant certain family members greater influence, should also be considered. However, important management positions can also be filled by family members, allowing them also to direct the operational activities.
Conclusion
The corporate structure of family enterprises is inextricably linked to the family identity. When choosing the right company form, clear legal foundations – supplemented by smart corporate governance regulations – are essential to ensure intergenerational stability, entrepreneurial success and succession.
This article is part of a multilingual blog series on German and Italian family businesses, created in collaboration with Valentina Dragoni and Martino Liva from Cappelli Riolo Calderaro Crisostomo Del Din & Partners. Learn more about the unique characteristics of Italian family businesses in Italian or English.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
