Comment by stakhanov | Hacker News Reader

Comment by stakhanov | Hacker News Reader

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They have a brief paragraph here [1] that indicates they considered these and decided against it: "The team considered several alternative ownership solutions to address these questions, including converting the business to a German non-profit and establishing a foundation. Both of these solutions had constraints, though, and neither offered the mixture of entrepreneurial flexibility and structure security they sought."

Stiftung (Foundation) generally work well if you have a bunch of money and you basically have a fixed "algorithm" that you want to execute around the money like: "Invest it all into an index fund, and in any year in which the fund returns a profit, pay out the profits to the family members of person X in the same ratios that would apply if those people came into X's inheritance". You then appoint a bunch of lawyers to serve as the board of the foundation. Because the "algorithm" is so precisely defined, the set of circumstances where the lawyers do their job wrong will be well-defined, and will constitute a breach in their fiduciary duty. There's basically no room for making entrepreneurial decisions along the way. It's a bit like taking a pile of money, putting it on a ship, putting the ship on autopilot, and giving up any and all direct control of the ship. Depending on what precisely that "algorithm" actually is, this might get you tax advantages. Or it might create non-financial positive outcomes you might be trying to achieve like making sure that your progeny will continue to enjoy the wealth you created for many generations to come while limiting the probability that any one generation can screw it all up for the later generations.

Social entrepreneurship is different from that: A social entrepreneur wants the goodwill and favourable tax treatment that comes from giving up their claim to ownership of the money generated by the business (this is what the gGmbH status does; it's a bit like 501(c)3 in the U.S.) -- But they want to retain control over the business. They want to make entrepreneurial decisions as they go, changing strategies along the way in whatever way they please, without restricting themselves too much to the execution of any predefined programme.

[1] https://purpose-economy.org/en/companies/ecosia/

For context, I live in Germany and am familiar with the landscape here. Also, I would not equate a 501(c)3 to a gGmbH; gGmbH is more like a B Corp (at least in some of the states that allow it; corporate law differs from state to state in the US). A gemeinnützige Stiftung (Foundation for public purpose) is much closer to a 501c3 than a gGmbH, and a Familienstiftung (Family foundation) is closer to a family trust. (At least for tax purposes, which is the territory I'm most familiar with in this comparison).

But that's not what I'm asking about. Unlike in the US, Stiftungs in Germany (both family and public-purpose) can own an unrestricted percentage of shares -- including all of them -- in normal companies (Kapitalgesellschaften). And I'm specifically interested *not* in restructuring a GmbH as a Stiftung, which is what Ecosia decided against, but rather, I'm wondering if there are any resources available discussing pros and cons of forming a Stiftung as a holding entity, fully owning a GmbH subsidiary (such a construct is not legally possible in the US).

From my perspective, this holding structure would provide much better legal insulation (in both directions) from the founders, preserve the operational flexibility of the (operational) GmbH, while allowing distributions from the GmbH (which would, by definition of being a 100% stakeholder, flow exclusively into the Stiftung) to be distributed by the (purely administrative) Stiftung, according to the founding documents. But I've never seen such an arrangement discussed in depth, which is why I'm asking about it.

Okay, well it sounds like you're deeper in the rabbit hole than I am, then. (I also live in Germany and have a passing interest for the law, though I'm no lawyer).

Regarding your last paragraph, where you say that a foundation provides better insulation from founder control, it sounds to me like you answered your own question: Retention of control vs. insulation from control is precisely the distinction here.

Foundations are typically for people who don't have the option of retaining control, even if they wanted to, because they are typically close to death and in the process of structuring an inheritance. Handing over control to person X is something they see as a threat, because they assume that X will screw it up, so they'd rather make it so that no one can have control.

With social entrepreneurship like Ecosia, founders are typically still young and somewhat idealistic. They want to retain the control, because them being in control is not something they see as a threat. Rather that's what they see as the best possible mechanism for their company/cause retaining its idealistic values. (Also, they are looking for something meaningful to do with their lives).

A cynic might notice that you're kind of looking at regular narcissism vs. communal narcissism here.

If you wanted to structure your social entrepreneurship type business as a foundation which owns 100% of the shares in "your" for-profit corporation, that doesn't work as a "have your cake and eat it too" solution, because either that means that the trustees of the foundation are actually your boss and you're just a replaceable employee with replaceable employee wages or, if you try to pull any shenanigans to make it so that this is not the case, the trust loses its tax-free / "community interest" status. Trying to game this system is something that rich people are routinely trying to do. I'm not saying that some don't get away with it, but the authorities generally have a lot of tools at their disposal to fight this sort of thing.

Control is maybe the wrong word here. GmbHs are required to have one or more natural persons as a Geschäftsführer, which would presumably just stay the founders, so they would retain control of the GmbH. The holding Stiftung would then impose the rules under which the GmbH would issue dividends, and (presumably) also retain the ability to fire the Geschäftsführer:innen, if the Satzung der Stiftung decided to. And of course the founders could also put themselves on the board of the Stiftung for added control. Interesting side note, this would probably result in the founders being Sozialversicherungspflichtig, but that's a whole different can of worms. But the founding documents of the Stiftung could perfectly well spell out exactly the situations under which the founders could be removed as Geschäftsführer der GmbH.

What I mean by legal insulation is more that, in this holding construct, the GmbH ceases to have any financial relationship to the founders. Stiftungs are sort of... headless financial pools governed strictly by their founding documents, completely divorced from the people that created them, and the GmbH would simply be an asset in that financial pool. That means that, for example, were someone to sue the founders, even for something completely unrelated, there is no possible way that shares in the GmbH could possibly end up someone else's hands. Typically when we talk about the liability limitations in corporations, we're talking about them in terms of shielding the founders from the actions of the company, but the inverse is in my opinion just as important (if you're truly interested in forming a self-governing social organization pursuing a social good). I'm not sure if there's any examples of shares in a gGmbH being assessed as assets in a civil case; that would be another interesting question to inform the decision.

That being said, one of the reasons that I'm so interested in the idea of a Stiftung holding, is that I think it also opens up options for actual democracy within the leadership of a company, which is a fascinating idea. That isn't a requirement in a Stiftung holding relationship, but I do think it's an interesting possibility.

At any rate, I think probably the primary downside of this idea is that, like I said, I've not seen any examples of it discussed publicly. Which means you'd need to be doing a lot of the legal legwork on your own -- which means lots of time spent talking to lawyers, which would be really expensive. But I think there's some really interesting possibility for innovation in terms of corporate governance here, in a way that, like I said, wouldn't be legally possible in the US, and it definitely seems like the structure that gives the social purpose the maximum possible protection.

I 100% agree with you that a Stiftung like that (possibly with a for-profit company as a subsidiary) would be the right structure if you wanted to maximize credibility around your community-interest status.

This stuff actually gets a lot of attention from lawmakers: For example, in the U.K. you have the “CIC” (community interest company). Some 13 years ago, David Cameron tried pretty hard to motivate enthusiasm for the idea of a “third sector”, something that's not government and not for-profit. In the U.S. you also have the “L3C” (low-profit limited liability company). In Germany, you have the idea of “Verantwortungseigentum” which was on the agenda for the previous government, though they then didn't get around to it, and you had Sahra Wagenknecht making it into a big talking point for her campaign.

But I don't think a lack of legal infrastructure is really the limiting factor here: As you noticed, we do have foundations (Stiftung) of various types, as well as coops (Genossenschaft). In addition, regular partnerships (like KG, OG) have recently been opened up so that their bylaws can now prescribe a purpose that isn't for-profit. A club (Verein) which in and of itself isn't for-profit, can have a sort of dual identity because it can become the proprietor of a sole proprietorship with a for-profit purpose (at least I seem to recall reading that such a thing is possible). Oh, and, of course, a corporation can, in theory, own 100% of its own shares. I recall reading about that, just please don't ask me where. You can basically wipe out ownership that way, without being subject to the stringent rules around foundations.

So, legal structures are as powerful and flexible as they are underutilised: I think it's the psychological side that explains why.

Usually, even if you have very good intentions, your best bet initially is to start your entity as a for-profit. Being able to operate cheaply and without cumbersome decision-making structures beats lofty aspirations for any business that just gets started. Not turning a profit in a given year (and not paying taxes because you don't turn a profit), is an option you always have. (There's no special paperwork needed for that). In fact: Not having any profit to worry about when it comes to your structure is the likely outcome. Having a profit and trying to decide how to make it so that your profits won't corrupt you in your idealism is a problem you would quite like to have! (Again: From the perspective of a founder who is just getting started).

Then, the day comes where you turn a profit quite regularly. And, at that point, once the flywheel has got going, truly giving up control will be psychologically difficult.

Very much agree in terms of the best strategy being simply to start a plain-jane Kapitalgesellschaft, probably either UG or GmbH, and go from there.

It is indeed possible to have a so-called "kein-Mann GmbH" where the company has bought back all of its shares, though my understanding is that it's a bit of a legal grey area, and certainly not settled law.

I agree that the legal infrastructure is almost certainly there, at least in the sense that there are absolutely plenty of lawyers and lawmakers that specialize in this area. My point is simply that, because it's so much less common, basically every situation ends up being unique, which means that the work that the lawyers are doing is almost always a one-off, which makes it really expensive. And so it's just not worth the effort.

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