Managing director of a GmbH

Managing director: Every GmbH needs a managing director, otherwise it is not capable of acting. This is because the managing director is the personal representative of a company to the outside world, who at the same time manages the company internally. As a corporation and legal entity, the GmbH is absolutely dependent on a personal representative.

Taking over the management of a GmbH is often accompanied by many amenities, from higher salaries to a stronger reputation. And the powers are also more extensive.

However, as managing director of a limited liability company you also have more responsibility than ordinary employees, more far-reaching tasks and, above all, more duties, some of which are regulated by law. At the same time, you lose some of the employee rights to which you are accustomed.

In this article by the Herfurtner law firm, you can find out what you have to bear in mind as a managing director of a GmbH, which provides essential information on this topic.

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Table of contents

1. Managing director of a GmbH – liability, rights and duties
2. GmbH managing director: Who is suitable?
3. Who cannot become a GmbH managing director?
4. How to become a GmbH managing director?
5. Dismissal of the GmbH managing director
6. The managing director’s contract
7. Who determines the managing director’s salary?
8. Social security obligations of the GmbH managing director
9. GmbH without managing director
10. Does the GmbH managing director have to live in Germany?
11. Disadvantages and risks as managing director of a GmbH
12. Lawyers advise

Managing director GmbH – liability, rights and duties

The limited liability company has two bodies, the shareholders’ meeting and the managing director. The supervisory board is an additional body for companies with 500 or more employees. As a GmbH managing director, you are subject to various duties, but you also have certain rights.

The duties in particular should be known so that breaches of duty do not occur, which can sometimes have serious consequences. Liability is also an important and sensitive issue.

We would like to deal with these three topics separately below. In addition, a lawyer from our law firm will be happy to answer any questions you may have:

Duties of a managing director

The duties arise from various circumstances, namely the law, the articles of association and the employment contract.

Duties under the GmbH Act

• Convocation of the shareholders’ meeting: Whenever it appears necessary to convene in the interest of the company.
• Duty to maintain share capital: Stop payment if this would result in a shortfall in the company’s share capital.
• Duty to apply for insolvency: Application for the opening of insolvency proceedings, at the latest three weeks after over-indebtedness or the onset of insolvency.

Duty according to articles of association

• Rules of procedure and information duties: If the duties to provide information are neglected, this may result in claims for damages.
• Power of representation: If there are several managing directors of a GmbH, it is important to consider whether one managing director has sole power of representation or is only authorised to represent the company jointly vis-à-vis third parties, i.e. may not conclude any transactions alone. If he or she violates this, the shareholders can claim against him or her for damages.

Obligation according to the employment contract

• Non-competition clause: A general non-competition clause is often agreed in the employment contract. This prohibits the managing director from competing against his own GmbH. In addition, there may be a special non-competition clause that regulates issues such as the obligation to consent to sideline activities or the prohibition of participation in competing companies.
  Furthermore, there is often a so-called post-contractual non-competition clause, which is intended to prevent a managing director from competing with the company after leaving it. However, this post-contractual non-competition clause must not amount to a professional ban.

Rights of a managing director

If you look at the GmbH Act, you will see that the duties of the GmbH managing director are laid down here, but not his rights. These include, for example, remuneration or holiday entitlement. The rights of the managing director are laid down in the employment contract (see below in the text).

Liability of the Managing Director – Due Diligence of a Prudent Businessman

§ Section 43 (1) GmbHG obliges the managing director to conduct the company’s business with the diligence of a prudent businessman. In doing so, he has the task of actively promoting the company’s purpose in accordance with the needs of the shareholders and thereby averting damage to the GmbH.

If the managing director does not fulfil his responsibility, he is liable to pay damages to the company. The widespread assumption that a managing director is not personally liable and only bears a small risk is therefore wrong.

The prerequisites for fault are a breach of duty, damage (if the company’s assets are affected) and any contributory negligence on the part of the managing director, who must prove that he is not at fault.

The responsibilities of the managing director that give rise to liability risks are divided into three categories: Duties during the formation phase, liability risks during the operation of the GmbH and liability risks during the crisis.

In addition to liability towards the company for breaches of duty in the internal relationship, the management can also be held liable for damages towards third parties in the external relationship.

When is the GmbH managing director liable with his private assets?

As the managing director of a GmbH, you are personally liable for the proper performance of your duties with your private assets. In order to avoid personal liability for damages, one must, among other things, fulfil one’s duties with the diligence of a prudent businessman (§ 43 GmbHG).

Who can become a GmbH managing director?

Only a natural person with unrestricted legal capacity is eligible for the office of managing director of a corporation. A legal person cannot be a managing director. Both shareholders and other natural persons can hold the office of managing director of a limited liability company.

The following applies to foreign citizens: If non-EU citizens are appointed as managing directors in Germany, they are subject to the provisions of aliens law. As a rule, a GmbH managing director does not have to have any formal qualifications. There are exceptions for actions that require the granting of a permit or authorisation.

If the granting of a permit is linked to proof of certain skills or technical knowledge, the GmbH managing director must fulfil these requirements, unless the trade in question allows the delegation of experience and technical knowledge to a senior employee.

The latter must be regularly authorised to give instructions and have the authority and responsibility to supervise. If an employed managing director of a craft enterprise fulfils the requirements under craft law, the enterprise may, for example, provide services that are subject to the register of crafts.

Who cannot become a GmbH managing director?

Under certain circumstances it is not possible to appoint someone as managing director. This is the case if someone is prohibited from practising a profession or trade on the basis of a court judgment or an enforceable decision by an administrative authority, provided that the object of the company is wholly or partly the same as the object of the prohibition (section 6 (2) GmbhG).

A further criterion for exclusion are convictions for criminal offences committed intentionally, such as for example, dragging out insolvency, insolvency offences under the German Criminal Code (StGB) or false statements under the German Limited Liability Companies Act (GmbHG) or the German Stock Corporation Act (Aktiengesetz).

With the exception of the period during which the offender was placed in an institution by the authorities, this exclusion from permission to act as a managing director applies with a duration of five years after the end of the sentence.

How does one become a GmbH managing director?

The GmbH Act stipulates that the managing director of a GmbH is appointed by the shareholders’ meeting (§ 46 no. 5 GmbHG). A resolution of the shareholders’ meeting is required for the appointment of the managing director.

For the appointment to become effective, the person concerned must agree to his or her appointment. In addition, the appointment of the managing director must be entered in the commercial register pursuant to § 10 GmbHG. However, the appointment is already legally effective even without an entry.

After the appointment of the managing director of the GmbH, the managing director represents the company both in and out of court. Although the managing director’s power of representation cannot be limited, he is bound by the instructions of the shareholders.

How many managing directors of a GmbH can there be?

Pursuant to § 6 (1) GmbHG, a GmbH may have one or more managing directors. If several managing directors have been appointed, they are only jointly authorised to represent the GmbH, unless the articles of association provide otherwise (section 35 (2) sentence 1 GmbHG).

In some GmbHs, one or more shareholders are simultaneously managing directors (so-called shareholder-managing directors or managing shareholders). In the vast majority of cases, however, a GmbH has salaried managing directors (so-called third-party managing directors) who do not hold a share in the capital (e.g. if large corporations maintain subsidiary GmbHs).

GmbH managing director after private insolvency

Despite insolvency proceedings, it is possible to continue working as a managing director of a limited liability company. This is because in order to partially satisfy creditors, one must earn corresponding income.

However, anyone who has been banned from trading or has relevant criminal records can be disqualified from acting as a managing director under § 6 GmbHG. The law (§ 6 subsection 2 GmbHG) lists the relevant offences that disqualify someone from acting as a managing director.

It is more difficult if one wants to become a shareholder in addition to being a managing director because the insolvency administrator has access to these assets. This should be discussed with the insolvency administrator in advance. This question no longer arises in the phase of good conduct.

Dismissal of the GmbH managing director

As soon as a managing director has been dismissed by the shareholders at the general meeting, his or her position as a corporate body of the GmbH ends. At the same time, the statutory and legal powers cease to apply.

Ordinary and extraordinary dismissal

Dismissal by the general meeting of shareholders can be ordinary and extraordinary for good cause. Good cause exists, for example, if the managing director has grossly violated his duties or is not capable of properly managing the company’s business.

Dismissal requires a proper resolution of the general meeting of shareholders and must be entered in the commercial register. In addition, the shareholders’ meeting must resolve to terminate the managing director’s contract, whereby the termination may be effected either in due time or, in individual cases, without notice.

Termination by the managing director

In addition, the managing director may also resign from office and give notice of termination to the company on his own initiative. He does not need good cause to do so.

He is also free to choose the time of termination, but care must be taken that the company does not suffer any damage as a result of his termination. In this case, he may be held liable by the shareholders.

The managing director’s contract

In most cases, the employment contract of the GmbH managing director is not an employment contract, but a service contract subject to the terms of the BGB. Labour law therefore only applies in limited cases.

The managing director’s contract, also called the managing director’s employment contract, is an important supplement to the appointment as managing director of a GmbH. The GmbHG already regulates parts of the rights and duties of the managing director, but not his salary or other related issues. These must therefore be regulated separately in a contract, such as a managing director contract or a managing director employment contract.

An executive position is not an employment relationship

The management is usually appointed by the shareholders’ meeting or by the articles of association and manages the company. According to the Federal Supreme Court (BGH), this so-called organ position cannot be reconciled with an employment relationship, which means that a managing director cannot be an employee according to the BGH.

Recognition as an employee

However, if certain conditions are met, the Federal Labour Court recognises the GmbH managing director as an employee.

A lawyer can assist in the drafting of a managing director’s contract and take into account the interests of all contracting parties involved. The Herfurtner law firm is active in corporate law and labour law, among other areas, and will be happy to support you with comprehensive information.

Who determines the managing director’s salary?

The remuneration of managing directors of a GmbH is determined by the shareholders’ meeting. The managing director can also determine his or her own salary if he or she is the sole shareholder. The so-called total salary is made up of various remuneration components, which are set out in the contract:

• Basic salary as a fixed monthly salary
• Christmas and holiday bonus
• Company car
• Pension commitments and other benefits
• bonuses/gratuities
• anything else in kind such as discounts, hosting private parties at company expense, renting flats, etc.

What remuneration is appropriate for a managing director regularly leads to disagreements between tax authorities and companies.

The tax office uses three criteria to determine whether the salary of the GmbH managing director is appropriate: the internal and external arm’s-length comparison and the half-partition principle.

The latter basically states that after deducting all managing directors’ remuneration, an annual surplus must remain in the company that is at least equal to the total remuneration of all managing directors.

Managing director of a GmbH without a salary

In some cases, the question arises whether it is possible to work as a managing director of a GmbH without a salary. This is often the case if the company has only one shareholder and this shareholder is also its managing director, for example in the case of a one-person GmbH. This is because just after founding the company, one may want to reduce the company’s expenses as much as possible.

In principle, the shareholders of the GmbH have complete control over the remuneration of shareholder-managers via the shareholders’ meeting. Accordingly, the shareholder-director’s activities for the company may be performed for a fee or free of charge.

If the activity of the managing director is gratuitous, however, the company must expect tax consequences if there is a hidden distribution of profits.

Employee or not?

In principle, a shareholder-director is not an employee, at least not if he owns a substantial share in the GmbH. Furthermore, he must not be restricted in his freedom of decision and work without a fixed schedule.

He must have sole signatory power and be unrestricted in his sphere of influence, i.e. not bound by instructions. In this case, there is no employment relationship between the company and the shareholder-managing director, but a service relationship.

The remuneration agreement is of decisive importance for the structure of the employment relationship, especially from a tax law perspective. In the absence of a contractual remuneration provision, it is deemed to be tacitly accepted if the performance can only be expected against remuneration according to the circumstances.

The amount of the remuneration can be freely agreed, but the exchange of services must be comparable to an arm’s length transaction. The remuneration may be reduced in the first year and subsequently increased on the basis of pre-determined parameters. If the remuneration is based solely on performance, the tax office classifies it as a hidden profit distribution.

Social security liability of the GmbH managing director

Whether or not the managing director of a GmbH is liable to social insurance essentially depends on his decision-making power. In this respect, no social insurance obligation applies if the managing director

• holds at least 50% of the shares in the company, or
• he can prevent a resolution because he has a blocking minority.

In these cases it is not a dependent employment relationship and therefore there is no obligation to pay social insurance.

Other indications of social security exempt activity

In addition, there are other cases in which it could be an activity of the managing director that is exempt from social insurance. For example, in the case of family GmbHs or the conversion of a sole proprietorship into a GmbH.

Further indications may be the absence of a duty to follow instructions or a significant entrepreneurial risk associated with the managing director’s activity. Particularly for financial reasons, the obligation to pay social security or its waiver plays an important role for a GmbH.

If the GmbH managing director is subject to social security contributions, the company must withhold the social security contributions from the salary and possibly also pay the employer’s contribution.

If the situation is not clear or if you are uncertain, you can consult a lawyer who will advise you on the subject of social insurance and give an assessment of the specific case.

GmbH Managing Director Health Insurance

Many GmbH managing directors exceed the annual remuneration limit due to their remuneration and are thus exempt from compulsory insurance. However, exemption is also possible regardless of the amount of remuneration, as the insurance limit, i.e. the minimum annual remuneration that entitles one to a free choice of health insurance (private or statutory), only applies to employees.

Accordingly, if you are not classified as an employee, you are free to choose the form of health insurance you wish to take out.

GmbH without managing director

In principle, a GmbH cannot exist without management, as it is not a natural person. Without management, a GmbH is accordingly incapable of acting. But what happens if the managing director of a GmbH is absent, for example due to illness?

If the management consists of more than one person, the other person or persons are in principle capable of continuing to manage the company’s business. However, it becomes problematic if it has been agreed that the management can only act or decide jointly.

If a managing director is absent for a foreseeable period of time, it must be determined for this period whether the company can manage without him.

Thus, no appointments or actions may be pending for which the managing director of the GmbH is indispensable. These include, for example, court dates or signatures due for tax returns, loan applications and the like.

In the event of a prolonged absence, there is an acute need for action on the part of the company. Thus, an application for emergency management can first be filed with the competent district court.

Furthermore, in the case of a management consisting of several persons, tasks can be taken over by other managing directors of the GmbH. In addition, the company can be represented by authorised signatories of the company, whereby under certain circumstances the provision that decisions may only be made together with the management must be removed by entry in the commercial register.

Does the GmbH managing director have to reside in Germany?

The following applies to German GmbHs: Members of the management of a GmbH do not have to be resident in Germany. A right of residence in Germany is also not required to be appointed as managing director.

However, the managing director must personally sign the company’s application for entry in the commercial register in publicly certified form. If the business is mainly conducted from Germany, special attention must be paid to any residence permits that may be available.

The GmbH Act does not have any regulations regarding the nationality or the residence of a managing director. Likewise, the managing director is free to choose his usual place of residence. The GmbH Act also does not require the managing director to have a command of the German language.

Disadvantages and risks as managing director of a GmbH

The disadvantages for managing directors of a GmbH essentially relate to the loss of the old employment relationship and protection against dismissal, as well as the risk of legal disputes, which can quickly run into money.

This is because all previous employment relationships between the employer and the employee end immediately when the employer and the employee conclude a new, documented managing director agreement.

Only if it is fixed in the managing director’s contract or taken into account in the verbally concluded contract is it possible to return to the old employment relationship after the managing director’s activity has ended. In addition, even if you were an employee of the company before you became managing director of the GmbH, you are not protected against dismissal.

Therefore, termination without cause is possible; only the agreed notice period must be observed. Ordinary termination is only permissible if the employment contract is limited in time and this was contractually agreed. Otherwise, the contract can only be terminated prematurely for cause.

Applicability of the Dismissal Protection Act

According to case law, however, the applicability of the Dismissal Protection Act can be contractually agreed. The Federal Supreme Court declared this permissible in a ruling of 10 May 2010 (2 ZR 70/09).

Moreover, a managing director has a disproportionately greater cost risk than an employee if he is dismissed and wants to take legal action. This is because the actions of a managing director are often not covered by general legal expenses insurance and special legal expenses insurance is expensive.

Financial burden

And because managing directors are obliged to take legal action before the district court, they must be represented by a lawyer. In doing so, they have to pay an advance on court costs, which can amount to several thousand euros, so that the court will even hear their case.

Moreover, in the event of defeat, not only their own lawyer must be paid, but also the opposing lawyer. With an average managing director’s remuneration, the cost risk in the first instance quickly rises to 30,000 euros.

In addition, legal disputes before the civil courts sometimes take much longer than comparable cases before the labour courts.

Lawyers advise

Our lawyers are at the disposal of companies in matters of corporate law. For example, we assist in the enforcement of claims for damages by the company against the management, in the employment contract or in the defence against liability claims.

In addition, we regularly inform our clients about current case law. For a non-binding exchange of information, you can contact one of our lawyers and get in touch with our law firm here.

Wolfgang Herfurtner | Lawyer | Managing Director | Shareholder

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