What is the best legal form?

This article was first published on the Fin Law blog.

Among the founders of new blockchain technologies, the assumption is widespread that the creation of a non-profit foundation, a non-profit GmbH (gGmbH) or an entrepreneurial company (gUG) is the legal form appropriate for the implementation of the project. In fact, there are many examples of projects that have chosen this path.

The Ethereum Foundation, founded in 2014, can be cited as one of the most successful examples in this context, knowing that it is headquartered in Zug and is subject to Swiss law. In the German legal field, the Berlin-based IOTA Foundation is probably the most prominent example, which has also been recognized as a non-profit organization.

In the following, the reasons for and against the use of a non-profit corporation, as this legal form may also be unsuitable.

How can a corporation be recognized as not-for-profit?

When a German company can be recognized as non-profit is clearly regulated in the tax code. This is possible if the entity in question pursues charitable objectives. According to the tax code, the pursuit of charitable purposes is present if the activity of the company is aimed at the selfless promotion of the general public in material, intellectual or moral matters.

There is no support for the general public if the public to be supported is clear from the start, as is the case with family foundations, for example. The law also establishes an exhaustive list of eligible areas. Besides religion, art, culture, sports and many other fields, science and research as well as consumer protection are eligible fields most likely to be considered in the case of new blockchain technologies. .

After all, nonprofit status can only be recognized if the society is selflessly active. This assumes in particular that it uses its funds only for its statutory purposes and that the partners or shareholders do not receive any profit-sharing or other benefits.

When does nonprofit recognition make sense for blockchain initiators?

Successful recognition of nonprofit status saves taxes. Non-profit corporations, for example, are exempt from inheritance, gift and property tax. Similarly, they do not have to pay tax on donations and in particular on contributions. Nevertheless, the creation of a non-profit legal entity in the case of the creation of new blockchain technologies only makes sense if the initiators do not pursue commercial objectives.

A recognized non-profit organization promoting a new blockchain technology will therefore be able to use its funds to promote further development of the software core, promote education and training opportunities related to the use of the technology, and promote general public access. On the other hand, purely commercial activities for profit, such as the operation of exchange platforms or crypto custody services, cannot be carried out.

Nonprofit as savior of a BaFin license requirement?

A common misconception is that a non-profit business cannot be subject to any BaFin licensing requirements. Admittedly, the authorization reservations of the German Banking Act (KWG) and the German Securities Institutes Act (WpIG) are only relevant if a provider carries out a regulated activity, does so at national level and also acts at commercial purposes, i.e. with the intention of creating a permanent business. profit, which is not usually the case with not-for-profit entities.

However, as an alternative to the requirement of commercial character, the reservations of authorization provide for the criterion of the need for a commercial exploitation constituted in a commercial manner, which is always applied if the exercise of the activity in question requires a certain work experience structure, such as proper accounting or employees.

Recognition as a non-profit company cannot therefore exclude the licensing requirements of the Financial Supervision Act.