Transferring a limited liability company (GmbH) managed by its founder as managing director to a family foundation is a proven and fiscally advantageous instrument in Germany for corporate succession and long-term protection of corporate and family assets. However, a change in the GmbH’s shareholders can fundamentally alter the managing director’s social security status.
Why correct social security classification is important
The German Pension Insurance (DRV) regularly checks whether managing directors of a limited liability company (GmbH) are actually self-employed or whether they are employed in the sense of social security law. This so-called status check is often carried out as part of a tax audit or upon request. An incorrect assessment can be expensive, and additional social security contributions, sometimes covering a period of several years, are common.
When is a managing director considered self-employed in Germany?
According to Section 7 of SGB IV, the distinction between employment and self-employment is based on the actual circumstances, in particular whether the person is bound by instructions and integrated into the work organization of the person giving the instructions.
In the special case of managing partners of a GmbH, case law, in particular the Federal Social Court, has further developed this standard. According to this, the decisive factor is whether the managing director has actual legal power to prevent unwelcome instructions from the shareholders. Only if he can exert a decisive influence on the fortunes of the company on the basis of his position under corporate law is he genuinely self-employed. Only then is he exempt from social security contributions.
This is typically the case in the following situations:
- Majority shareholding: The managing director holds more than 50 percent of the company shares.
- Blocking minority: The managing director holds less than 50 percent of the company shares, but has comprehensive veto rights on all important decisions.
- Indirect shareholding: The managing director does not hold a direct stake in the company, but his influence under corporate law is indirectly ensured through a parent company (holding company).
If the necessary legal authority is lacking, there is much to suggest that the position is one of dependent employment and therefore subject to social security contributions.
Foundation model: Loss of legal authority?
If the shareholder-managing director transfers his shares in the GmbH to a foundation, he no longer holds them himself. As a result, he loses his position under corporate law in the GmbH and his legal authority. Last year, the North Rhine-Westphalia Regional Social Court (LSG) had to decide whether the managing director of the GmbH would remain exempt from social security contributions in such a case or whether he would become subject to social security contributions (LSG North Rhine-Westphalia judgment of January 31, 2025 – L 22 BA 89/24).
In the case in question, the plaintiff was initially the sole shareholder and managing director of a GmbH. She transferred all shares to a family foundation she had established, of which she was a lifetime member of the board of directors alongside other members and in which she had a right of veto. After the transfer, the German Pension Insurance Fund determined, to the surprise of the managing director, that she was employed as the managing director of the limited liability company and was therefore subject to social security contributions. The plaintiff argued that her veto right on the foundation’s board of directors allowed her to continue to exert significant influence over the limited liability company, so that she should be treated as a controlling shareholder. The lower courts and the German Pension Insurance Fund took a different view and affirmed the social security contribution obligation.
No legal authority after transfer of all shares to family foundation
The North Rhine-Westphalia Regional Social Court also dismissed the plaintiff’s appeal and confirmed the classification of her activity as dependent employment under social security law. In the court’s opinion, after the transfer of all shares to the family foundation, the plaintiff no longer held any direct or indirect stake in the capital of the limited liability company, meaning that she no longer had any legal authority under corporate law. In the court’s view, the veto right enshrined in the foundation’s statutes was not sufficient to establish a degree of influence comparable to that of a controlling shareholder. Although the plaintiff was able to prevent resolutions from being passed, she was not in a position to enforce her own decisions.
Is the court’s view convincing?
We do not find the view that dependency should be determined solely on the basis of formal capital participation to be convincing. The decisive factor should be the actual legal power to influence the GmbH. The decisive factor should therefore be whether the person concerned, regardless of their economic participation, is in a position under corporate law to significantly determine or oppose the will of the company.
In our opinion, this is the case in many practical situations. In our view, independent activity is conceivable, for example, if the articles of association of the family foundation grant the managing director such extensive powers that he can determine the business policy of the limited liability company independently on a permanent basis without having to follow instructions from the foundation’s board of directors or other foundation bodies. If, for example, the foundation has only a one-member board in the person of the managing director of the limited liability company himself, the legal position of the managing director should be sufficiently strong. Not only can he determine the fate of the limited liability company on his own in this way, but no third party can oppose him.
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In a foundation board consisting of several members, it is conceivable that the managing director of the GmbH is granted an exclusive right to represent the foundation at the GmbH’s shareholders’ meeting, a comprehensive right to issue instructions to the foundation’s board, or the final decision-making authority in strategic matters relating to the GmbH.
Such a legal position would amount to de facto sole control and, in our opinion, would justify an independent activity exempt from social security contributions, even if there is no or only a small direct capital participation in the GmbH.
WINHELLER advises on the social security status of managing directors
For entrepreneurs, this results in a clear recommendation for action: before transferring a GmbH to a foundation, it should always be borne in mind that the social security status of the managing director may change. Careful drafting of the foundation’s statutes is therefore also required in this regard. In order to maintain legal certainty, it is also advisable to apply for a status determination procedure in accordance with Section 7a SGB IV at the German Pension Insurance Fund. Please feel free to contact us with any questions you may have!
