What founders should know about the GmbH management contract

The relationship between the company and the management is governed by contract and is set out in the management contract. The legal framework and content of the contract can be very complex: it touches on several different areas of law. These are the key points you need to know: 

• The management contract is not an employment contract and is subject to the provisions of the service contract, but it can be actively agreed as an employment contract (although this is controversial in legal practice).
• In practice, this means that only some provisions of labour law apply to it. 
• The GmbH law regulates some rights and duties of the management. 
• However, some general conditions must also be regulated: For example, remuneration. 

Why is it controversial whether directors can be employees? - You have to understand that the management is an organ of the company. The organs of a company cannot at the same time have an employment relationship with their employer (the company). The Federal Court of Justice therefore denies the compatibility with an employment relationship in the course of the management being a corporate body. Some Federal Labour Courts, on the other hand, recognise managing directors under very specific circumstances and conditions.

If a GmbH needs to be registered, it will need a director. You should also set out all the details relevant to the appointment of the director in the managing director's agreement. Among other things, this will determine the majority of voting shares required to elect the director.
If the general meeting decides to appoint an 'external managing director', this person will be given an employment contract.

The management of the GmbH is an organ of the company (§ 6 GmbHG). The following requirements must be met for the appointment of this organ: 

• He/She must be a natural person with full legal capacity. As a legal person, the GmbH has no legal capacity, which is why the managing director represents the GmbH in judicial and extrajudicial matters. 
• Legal persons/minors and persons with limited legal capacity cannot take over the management of the company. 
• The managing director must be appointed by the shareholders. 
• The managing director can either be one of the shareholders or an external person, who is then called an external managing director. 
• The natural person who wishes to take over the management of the company must also be suitable to do so: This means that they must not be in conflict with the law. Suitability may be lacking in the case of insolvency offences, fraud/embezzlement/imprisonment.

The GmbH Act stipulates that a managing director agreement is not absolutely necessary for a GmbH to be authorised to act. In practice, however, it has been shown time and again that it is definitely a useful addition to verbal agreements. 

In addition, most directors are likely to be very interested in having such a document of their own accord. After all, it is a written agreement between the GmbH shareholder and the managing director that can prevent misunderstandings - not only during the formation of the GmbH, but also afterwards.

With a sample managing director contract, you can give you a rough idea of what information can or should be included in such a document. 

However, as there is much to consider regarding to the rights and obligations of managing directors, their remuneration and other factors, it is always advisable to seek expert advice. After all, your GmbH is unique and should be treated as such. 

Our team can help you address these and other factors into account in your managing director contract.

The appointment of the management must be determined by a resolution of the general meeting. When a GmbH is formed, the management must be appointed before the company is entered in the Commercial Register. This is because the GmbH cannot act without a management board. 

If the management of a GmbH ceases to exist, for example due to incapacity to act, termination of employment, the death of a managing director or due to a termination agreement, the GmbH will initially remain incapable of acting. It is therefore always advisable to have an 'emergency plan' for such a loss of management. Such precautions can and should be set out in the company's articles of association. Further provisions for the management regarding voting rights, appointment and much more can also be useful. 

In principle, the shareholders have the choice of appointing one of the shareholders as managing director or selecting an external person for this position (external management). 

In principle, the management is one of the company's organs. However, it cannot be an organ of the GmbH and an employee at the same time. This is problematic because managing directors may hold voting rights to such an extent that their decision-making power in the shareholders' meeting may conflict with their position as employees. This is the case when a shareholder managing director is appointed who simultaneously holds shares and voting rights in the GmbH and is entrusted with the management of the company. 

If a managing director holds few (or no) shares in the GmbH and is not allowed to determine when and where he or she works, the status of employee comes into play. 

The following details should then be included in the relevant contract: 

• Authority in relation to management
• General rights and duties
• Rules on transactions requiring consent 
• Liability
• Place of work and working hours
• where necessary: Exemption from the provisions on self-dealing under Section 181 of the German Civil Code (BGB)
• non-competition clause
• Holiday entitlement
• Remuneration and bonuses
• Compensation in case of illness
• Duration of the contract
• Period of notice

It is also a good idea to refer to the relevant rules of procedure.

If the director is not considered to be an employee, the director is bound to the company by a service contract. The problem is that the managing director does not benefit from certain protective rights under employment law. For example, there is no direct entitlement to sick pay under the Continued Pay Act (Entgeltfortzahlungsgesetz). The same applies to employee-friendly protection against dismissal. 

This makes it all the more important that these benefits are included in your employment contract: 

• Continued payment of wages in the event of illness 
• Entitlement to holiday 
• Reasonable notice periods 
• Conclusion of life/pension and disability insurance policies 
• Participation of the company in the cost of health insurance

Ordinary termination is possible within the mutually agreed contractual rules. However, the employment relationship can also be terminated in other ways: 

• Dismissal: The general meeting can dismiss the management. A simple majority is usually sufficient (unless the articles of association provide otherwise). If the managing director is also a shareholder, he can also vote. The dismissal is effective if it has been published. 
• Resignation of directors: The directors may also resign at any time. This must be declared to the general meeting; it is not necessary to do so in writing, but it is advisable. When resigning, you should always bear in mind that you may be liable for damages.
• Expiry by time and death: When your contract expires or the director dies, the contract is terminated. 

A managing director's social security liability depends on whether he or she is considered an employee.

In principle, § 7 (1) SGB IV stipulates that anyone who is not self-employed and is in an employment relationship is subject to social security contributions. This does not result in a clear distinction for management. On the one hand, the managing director gives instructions and creates his own organisational structures; on the other hand, he is also dependent on the will of the shareholders. 

A basic distinction can be made as follows:

• Shareholder-managing director: Anyone who is both a director and a shareholder, and who holds at least 50% of the shares in the company, is not bound by instructions in his activities and is therefore not subject to social security contributions. If less than 50% of the shares are held, it must be decided on a case-by-case basis to what extent the person concerned is actually bound by instructions. In individual cases, this may result in the person becoming liable for social security contributions. 
• External managing director: Here, too, the extent to which the director is actually bound by instructions will determine whether or not he or she is subject to social security contributions. 

Important: A status determination procedure (Statusfeststellungsverfahren) may always be advisable in order to eliminate ambiguities!

Whether managing directors sign a managing director's employment contract or a managing director's service agreement depends on many details. Because there are so many different areas of law involved and so many subtleties to consider, you should always seek expert advice when in doubt.

Our team will show you not only how to set up a GmbH, but also how to avoid misunderstandings from the outset with a managing director's agreement.