04.07.2017 | KPMG Law Insights

Breathing a sigh of relief for non-profit daycare associations: legal and registration capability exists

Breathing a sigh of relief for non-profit daycare associations: legal and registration capability exists

In its decision of May 16, 2017, Case No.: II ZB 7/16, the Federal Supreme Court overturned the “Kita case law” practiced by the Kammergericht since 2011. This was expected by very few people.

“Kita Jurisprudence” of the Superior Court of Justice
In recent years, the Kammergericht (KG) has repeatedly ruled that non-profit associations that operate day care centers for children are not eligible for registration and thus do not have legal capacity. For the KG, the associations are mainly aimed at economic business operations due to the operation of the daycare centers and are therefore not to be classified as non-material associations within the meaning of Section 21 of the German Civil Code (BGB). This case law has been welcomed in the literature and is considered to be consistent and in line with the protection of creditors.

Decision of the BGH of May 16, 2017
Now, in the case of a Berlin association that operates nine daycare centers, each with 16 to 32 children, the BGH has overturned the ordered deletion of the association from the register of associations. While the KG assumed that the operation of the daycare centers made the association a non-registrable economic association and that the general purpose of child care and education was not relevant, the BGH took a different view. In the opinion of the BGH, the operation of the daycare centers is covered by the so-called secondary purpose privilege, according to which an economic activity is permissible if it does not become the main purpose of the association but serves this purpose.
The Federal Court of Justice attributed an indicative effect to the recognition of the association as a non-profit organization to the fact that the actual purpose of the association was not an economic one, but the idealistic purpose of promoting education and youth counseling. Accordingly, the association may continue to be registered in the register of associations.

Relevance for practice – need for action
According to the decision of the Federal Court of Justice, in the future, when assessing the registrability of associations, it is primarily the purpose defined in the articles of association and not the actual economic activity that is important. Therefore, special attention should be paid to the formulation of the articles of association and the purpose of the association not only with regard to the recognition of non-profit status, but now also for the registration and legal capacity.
Conversely, for associations that are not recognized as non-profit, the BGH’s decision is likely to mean that it will be even more difficult for them in future to be entered in the register of associations and thus to acquire legal capacity. However, this could be remedied by the reform of associations as part of the legislative process currently underway “to facilitate entrepreneurial initiatives arising from civic engagement.” This procedure is to be completed before the end of this legislative period and, in particular, will re-regulate the economic association.

Irrespective of the fact that non-profit daycare center associations can be legally and registrable after all and that there will also be simplifications for the economic association in the future, the question still remains in practice whether the legal form of the association is always the best legal form for the operation of daycare centers or other facilities. Recently, the legal form of the non-profit limited liability company (GmbH) has become more and more common. Which legal form is the right one, however, remains to be examined in each individual case. If necessary, a change of legal form from a registered association to a limited liability company (gGmbH) may also prove useful.

We will be happy to assist you in drafting the articles of association as well as any necessary amendments. We will also be happy to advise you on the question of the appropriate legal form and any necessary change of form, as well as on any other questions you may have.

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