Today, the family foundation is one of the most frequently recommended tools for succession planning in Polish private companies, but like every solution it has its limits. From the perspective of the business owner, board member and CFO, understanding the disadvantages of a family foundation is just as important as understanding its advantages, since it allows decisions to be made consciously and helps avoid solutions inadequate to the real family situation. PLA.partners points out to private clients the limits of a family foundation before they turn into an operational or tax problem.
What are the disadvantages of a family foundation in business practice
The first and most frequently mentioned disadvantage is the limitation of the scope of activity. A family foundation that wishes to benefit from the corporate income tax exemption is restricted in its operation to defined, permitted areas of business activity. Any step outside this catalogue creates tax risk.
The second feature that some owners treat as a disadvantage is the relatively new character of this institution in Polish law. For this reason the practice and case law concerning family foundations are still limited, which translates into a certain margin of uncertainty in non-typical situations. Maciej Pilarek, attorney and partner at PLA.partners, points out that this margin is not a reason to abandon the family foundation, but should be taken into account when designing solutions.
Entry threshold, the minimum assets to launch the foundation
Establishing a family foundation requires assets of at least PLN 100,000, which must be contributed to the founding fund. For some private clients this is a significant entry threshold, although in practice clients for whom the family foundation is a strategic tool usually have assets significantly higher.
The founding fund need not be covered with cash, it may also consist of movables or real estate. PLA.partners experts help design the structure of foundation contributions so that it both meets the minimum value requirement and is optimal from the perspective of asset planning.
Risk of a poorly drafted statute
The statute of a family foundation is a document that determines how the foundation operates over a multi-year horizon. A poorly drafted statute may lead to loss of control over assets and expose the family to potential disputes.
The most frequent sources of statute related risk in the work of the PLA.partners team are: overly rigid decision-making rules not matched to the realities of the family, an unclear distribution policy, poorly designed foundation bodies, lack of a mechanism for resolving disputes between beneficiaries and lack of flexibility in a changing family situation.
Ongoing costs of a family foundation
A family foundation generates ongoing costs, often not small, including those related to full accounting, possible remuneration for the management board and the supervisory board. These are costs that must be planned and included in the long term family budget.
In projects run by PLA.partners these costs are analysed already at the foundation design stage, so that their structure is realistic and does not surprise the founder in the first years of the foundation’s operation.
Without a specialist, a family foundation may become a source of risk
A family foundation helps secure assets, but without a specialist at the set-up stage it may turn out to be a source of greater risks than benefits. Improper drafting of the statute, incorrect assessment of permitted activity, a misaligned distribution policy or a poorly planned schedule of contributions can destroy the benefits the foundation is theoretically meant to bring.
Maciej Pilarek points out that this is an area where the value of an adviser’s work goes beyond the formal preparation of documents, it lies in strategically designing a solution coherent with the family arrangement, the business and the founder’s purpose.
Alternatives that should not be ignored
Many of the goals commonly associated with a family foundation can also be achieved with other legal instruments. The family foundation is not always the best solution, in some situations classical holding structures, foreign foundations, insurance policies or shareholder agreements prove more effective.
In the practice of the PLA.partners team, the decision on a family foundation is preceded by a comparison with alternatives. Only an analysis of the client’s context allows the conclusion whether the family foundation is the right instrument, or whether a better effect can be achieved by another tool.
Legal and business consequences for the client
Awareness of the disadvantages of a family foundation translates into specific risks worth considering:
- limitation of the foundation’s activity to a defined catalogue,
- exposure to tax risk where activity goes beyond the permitted catalogue,
- the need to bear ongoing costs of foundation administration and accounting,
- risk of loss of control where the statute is poorly designed,
- the need to engage a specialist adviser in design and ongoing servicing,
- limited support of case law in non-typical situations.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, addressing the disadvantages of a family foundation in an informed way covers:
- diagnosis of the adequacy of the foundation to the real family situation,
- comparison with alternative asset planning instruments,
- design of the statute with flexibility and conflict resilience mechanisms,
- assessment of ongoing costs of the foundation over a multi-year horizon,
- selection of an appropriate corporate servicing model,
- implementation schedule providing for gradual asset contributions,
- preparing the foundation’s board to work within the permitted activity.
Contact PLA.partners Law Firm
Do you need legal support or an individual analysis of your matter? Visit PLA.partners and contact our team, we will help assess the situation and propose specific solutions.
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