In the advisory practice of PLA.partners, one of the frequently asked questions about building a vehicle to accumulate and protect assets is, family foundation or holding limited liability company? Both constructions perform important functions in Polish law, but in large part they pursue entirely different goals. One is a tool of long term protection and transfer of assets to the family, the other is a classical form of conducting active business. The choice between them is not ideological, it is the consequence of a thorough analysis of the owner’s objectives. PLA.partners helps private clients compare these two solutions and, in many cases, combine them into a coherent structure.
Family foundation or limited liability company? Starting point of the decision
The choice between a company and a family foundation should depend on the purpose for which one of these organisations is to be set up. A family foundation works better in long term asset protection, succession planning and ordering of flows between business and family. A limited liability company is the basic vehicle for conducting ongoing, active business, including generating profit, employing staff and performing market contracts.
Maciej Pilarek, attorney and partner at PLA.partners, points out that in many projects the private client does not have to choose between these solutions. The most frequently encountered model is hybrid: an operating company runs market activity, and a family foundation acts as that company’s owner, protecting and ordering the family’s assets.
Purpose of operation, the fundamental difference
A family foundation does not operate solely to generate profit, a limited liability company does the opposite. This is not a nuance, it is a fundamental difference. A limited liability company is built to run a profit oriented business and to share profit among shareholders. A family foundation is to protect assets, transfer them to successive generations and carry out a distribution policy resulting from the founder’s will.
In the practice of the PLA.partners team, this directional decision is the starting point of the conversation with the client. Only after defining whether the client needs to conduct active business or to secure assets is it possible to indicate the appropriate legal construction.
Business activity, permitted and limited scope
A family foundation may conduct business activity, but only within a limited scope indicated in regulations as the so-called permitted business activity. Going beyond this catalogue results in loss of the tax exemption with respect to income outside the catalogue. A limited liability company has no such limitations, it operates within the full scope permitted for entrepreneurs.
This parameter is decisive in situations where the owner considers whether the family foundation may run a specific business activity, for example production, services or short term rental. PLA.partners experts analyse the planned business model each time against the catalogue of permitted activity.
Owner versus founder, the asset structure
In the case of a family foundation, there is no figure of an owner. Assets contributed to a family foundation become its property, and the foundation itself acts as the owner of those assets. The founder is not the owner of the foundation or of its assets, but in the statute may set the rules for managing the property and define the circle of beneficiaries. A limited liability company has shareholders who are its owners and who exercise share rights, including the right to participate in profit.
From the perspective of succession planning this is a fundamental difference. In a limited liability company, shares are inherited, divided and subject to classical rules of trading. In a family foundation, assets are not inherited in the classical sense, the foundation operates after the founder’s death independently of the personal fate of particular family members.
Taxation, family foundation versus limited liability company
A family foundation is, as a rule, exempt from corporate income tax within the scope of permitted business activity. Distributions to beneficiaries are taxed at the standard rate of 15% in personal income tax, and in defined family variants apply rates of 10% or exemption (0%). A limited liability company is taxed at the standard rate of 19% in corporate income tax or 9% for small taxpayers, and distributions of profit to shareholders are additionally taxed (PIT 19% for natural person owners).
In the practice of the PLA.partners team, this tax arrangement is one of the significant arguments in favour of the family foundation when the private client wants to accumulate and grow assets rather than only generate ongoing operating profit.
Hybrid model, family foundation and limited liability company together
In private client practice, the family foundation and the limited liability company are not competing solutions, but complementary. The most frequently chosen model is one in which a limited liability company runs active business and a family foundation is its shareholder, that is the owner of the shares. Such an arrangement allows the operating efficiency of the company to be combined with the long term asset protection provided by the foundation.
Maciej Pilarek points out that a well designed hybrid model achieves a tax, succession and protection effect unattainable in a stand-alone limited liability company or a stand-alone family foundation.
Legal and business consequences for the client
From the perspective of the owner, board and finance team, the choice of legal construction means:
- a difference in long term protection of assets against economic and succession risk,
- a difference in the possible scope of business activity,
- a difference in taxation at both entity and distribution level,
- a difference in the mechanism of transferring control to successive generations,
- a difference in accounting, reporting and corporate obligations,
- a difference in how assets are treated in any family conflict or divorce.
Possible actions, a plan for the business owner
In the practice of the PLA.partners team, the decision on a family foundation, a limited liability company or a hybrid model follows a sequence:
- diagnosis of the client’s objective, whether the priority is asset protection or active business,
- analysis of existing ownership structures and their efficiency,
- assessment of assets, economic risks and succession plans,
- design of the target construction, stand-alone foundation, stand-alone company or hybrid model,
- tax assessment of the selected solution,
- implementation schedule, including the order of setting up entities and contributing assets,
- ongoing servicing plan, including accounting, reporting and corporate servicing.
A family foundation is the better choice for those who want to protect their assets, and a limited liability company for those who wish to conduct active business activity oriented directly at profit. Most often, however, the right answer is a combination of both solutions into a coherent structure.
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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