Introduction
Private foundations serve to preserve wealth and organize succession. But can they also run a business? The answer differs considerably across European legal systems. While some jurisdictions allow foundations to conduct business activity directly, others restrict them to managing and preserving their assets.
Germany, Switzerland and Liechtenstein: Foundations Can Run Businesses (with Limitations)
German law takes a relatively liberal approach. A foundation may pursue any lawful purpose, and there is no general prohibition on conducting business activity. German law therefore recognises both foundations that own shares in companies, operating businesses indirectly, as well foundations that conduct business directly.
There is, however, an important limitation. Business activity cannot become the foundation’s primary purpose. A foundation cannot simply be established to accumulate wealth for itself. It must pursue an external purpose, typically for the benefit of beneficiaries or the public. Business activity may therefore serve as a means of achieving that purpose, but it cannot replace the purpose itself. In practice, German law permits foundations to combine private or public purposes with business activity as a secondary function.
Swiss law follows a similarly liberal approach. Both foundations conducting business directly (Unternehmensträgerstiftung) and foundations holding shares and conducting business indirectly (Holdingstiftung) are permissible. Although the admissibility of direct business activity was once controversial in legal scholarship, the Swiss Federal Court rejected the idea that foundations are inherently restricted to non-economic purposes. The decisive limitation remains the prohibition of a purely self-purpose foundation: the foundation must ultimately serve an external purpose rather than merely manage a business for its own benefit.
Liechtenstein takes a somewhat different approach. A foundation may freely hold shares in companies, while direct business activity is expressly restricted. Direct business activity is permitted, in particular, where it serves a public-benefit purpose or is necessary for the orderly investment and management of the foundation’s own assets.
Austria and Poland: Holding Wealth, Not Running a Business
Austria and Poland have adopted a much more restrictive approach. Both the Austrian private foundation (Privatstiftung) and the Polish family foundation (fundacja rodzinna) are, as a general rule, prohibited from conducting business activity directly.
This does not mean, however, the total prohibition of conducting business. Both legal systems expressly permit important exceptions. In Austria, a private foundation may conduct merely secondary business activity. Most importantly, it may hold shares in companies, which is not regarded as conducting business activity. This makes the holding foundation one of the central practical applications of the Austrian private foundation: the foundation does not itself operate the business, but it may own the company that does.
The Polish model follows a similar logic. The Family Foundation Act contains a closed catalogue of permitted business activities, including the sale of property in specified circumstances, leasing, and participation in commercial companies and other entities. This allows the family foundation to hold shares and organise holding structures while preventing it, in principle, from competing directly with ordinary business entities.
Two Models of the Private Foundation
The analysis shows that there is an important distinction between running a business and owning a company that runs business. A foundation may be prevented from acting as an entrepreneur in its own name while being fully capable of exercising shareholder rights in a company that conducts the business. In this sense, the prohibition of business activity pertains only to conducting business directly. Indirect operation of business (through other entities) is in all circumstances permissible.
The comparison reveals two broader models. Germany, Switzerland and, to a somewhat lesser extent, Liechtenstein are relatively open to the idea of the foundation’s direct engaging in business activity. Austria and Poland, by contrast, draw a clearer line between the foundation and the operating business. Such an approach reflects the belief that a private foundation should preserve the assets entrusted to it rather than grow them. The ban on engaging in commercial activities prevents the foundation from undertaking riskier investments. Its introduction indicates that the foundation is viewed as a passive entity whose role is to safeguard the assets it has acquired, rather than to grow them. This approach is probably more secure from the perspective of basic functions of a foundation oriented towards wealth preservation, long-term ownership and succession.
Dr Kacper Górniak