GmbH-Geschäftsführer: Everything you need to know about the GmbH managing director

Contents

How is a GmbH managing director appointed?

Generally, a shareholders’ resolution is the way to appoint a managing director of a GmbH. From the time of the official appointment, the managing director represents the GmbH in and out of court.

What are the prerequisites for becoming a GmbH managing director?

The GmbHG (limited liability company law) explicitly lays out who may become the MD of a GmbH. That is, natural persons and persons with full legal capacity.

This means that no legal entity, such as an incorporated company, may become the managing director of a GmbH. A GmbH as managing director is thus fundamentally not allow by law.

A managing director must also be “legally capable”. This means only persons over the age of 18 who are allowed to manage their financial affairs may be appointed, which, thus, excludes minors.

Persons who have been legally convicted for insolvency offences may not become managing directors of a GmbH within the next five years. Past prison sentences from the categories of fraud and embezzlement also stand in the way of an appointment. At the notary’s office, the managing director must sign a declaration that these and other grounds for exclusion don’t apply.

Gesellschafter-Geschäftsführer vs. Fremdgeschäftsführer

Shareholder director vs. external director

The MD can either be a shareholder (known as a Gesellschafter-Geschäftsführer) or an employee of the company who is known as an external managing director (Fremdgeschäftsführer).

A managing director with shares is particularly influential in a GmbH because he fulfils a dual function: as a shareholder, he may both participate in the decision-making process and implement these decisions as managing director. A managing director with more than 50% of the voting shares is also called “abeherrschender Geschäftsführer” (controlling managing director).

In contrast, the Fremdgeschäftsführer (external managing director) is “bound by instructions” and is often not operating independently, as he has an Arbeitsvertrag (employment contract) and not a Dienstvertrag (service contract).

What should I know about the GmbH managing director agreement?

Before the managing director of a GmbH can start in the position, there has to be a managing director contract, ideally in writing.

Although this contract is obligatory for individual agreements, there isn’t an official prescription for it. However, the managing director can only be appointed by convening a Gesellschafterversammlung (general meeting or shareholder meeting).

Under certain circumstances, the managing director can also be an employee, in which an Arbeitsvertrag (employment contract) comes into force. If there is no employment relationship as an employee, the contract then becomes a so-called Dienstvertrag (service contract).

In addition to the fundamentals of any employment contract, the managing director contract should contain further provisions:

• Travel expenses (Reisekosten)
• Company car (Dienstwagen)
• Degree of responsibility (Grad der Verantwortung)
• Special duties (Besondere Aufgaben)

How much can the salary of the managing director be?

The salary of a GmbH MD is a frequent point of contention in Germany. Although it can be above what an average employee makes, the remuneration must be ‘appropriate’. Otherwise, there is a risk that it’ll be considered a hidden profit distribution during a tax audit.

The tax authorities consider managing director salaries to be appropriate if they’re comparable to other managing director salaries in the same industry and company size. The individual salary components (fixed salary, Christmas and holiday bonuses, pension commitments, etc.) also play a role.

Insichgeschäfte: Can a managing director engage in ‘self-dealing’?

Section 181 of the BGB (German civil code) states that managing directors may not enter into contracts with themselves, except in the fulfilment of obligations (aka self-contracting which is Selbstkontrahierung in German). Similarly, managing directors are not allowed to engage in multiple representations under this law. The term used to describe this kind of activity is Insichgeschäfte (self-dealing).

However, in practice, GmbH managing directors are generally exempted from this clause to ensure a smooth flow of business. This is particularly useful if the (shareholder) managing director runs several companies. When appointing the managing director, it should therefore be considered to what extent an exemption from the restrictions of § 181 BGB is reasonable and necessary. If self-dealing is to be possible, this must be specifically mentioned in the employment contract to prevent misunderstandings.

Does the GmbH managing director have to pay social insurance contributions?

It is not always clear whether the MD of a GmbH is liable to pay social security contributions. A fundamental criterion for this Sozialversicherungspflicht (compulsory social insurance contributions) is whether the managing director is “bound by instructions”. As soon as a managing director gives instructions and structures, he or she is operating independently. That is, self-employed as opposed to employed. In this case, the managing director is not liable for social insurance.

However, if this role is integrated into an existing order and is bound by instructions, there is no self-employed activity. In this case, the managing director is liable for social insurance. The boundaries between self-employed and employed activity can be fluid, which can make it difficult to assess the individual case. In the case of shareholder directors, their share in the company and their voting rights are also taken into account.

If the shareholder-director has a blocking minority, this impacts the social security obligation. A blocking minority enables the shareholder to block resolutions and decisions of the shareholders’ meeting. This is an indicator of having a strong influence and, thus, self-employment, which is not classified as subject to social security contributions.

If in doubt, the GmbH can apply for a status determination procedure to get official clarification of its situation.

What are the tasks and duties of the GmbH managing director?

The core duties of the GmbH managing director include the realisation of the company’s business purpose and supporting the achievement of the company’s goals. The company’s interests must be safeguarded and the company’s assets must be managed. A managing director represents the GmbH both in and out of court. Furthermore, it is the duty of the managing director not to cause damage to the GmbH itself and to avert imminent damage to it.

What is the liability of the GmbH managing director?

If an MD fails to do his or her duties inadequately or, in the worst case, not at all (negligence or the like), then personal liability for the damages kicks in.

A distinction is made between internal liability and external liability. Internal liability exists vis-à-vis the GmbH and the shareholders, and external liability exists vis-à-vis third parties, for example, customers, suppliers or even authorities.

This points to the fact that the GmbH managing director’s position is not without its risks.

How is a GmbH managing director dismissed?

A managing director’s contract can both be for a fixed or indefinite term. In the case of a fixed term, no further notice of termination is required after the contract ends.

The appointment as MD can be withdrawn by the general meeting of shareholders at any time and thus dismissed. In addition to dismissal by resolution, an ordinary notice of termination must be given.

Extraordinary termination is also possible to dismiss a GmbH managing director, but “important reasons” must exist, according to § 626 BGB.

What happens if a GmbH doesn’t have a managing director?

What happens if the GmbH suddenly finds itself without a MD? If the managing director of the GmbH has resigned or been dismissed, emergency management is appointed.

How does a GmbH get a new managing director?

If the current MD is to be dismissed, a new managing director should ideally be ready. The GmbH must notarise every change and report it to the Registergericht (registration court). A change of managing director therefore always incurs costs, e.g. for notary, registry court and severance pay for the old managing director. If the GmbH was formed using the Musterprotokoll, there are some extra things to note.

Personal bankruptcy

If the MD of a GmbH is threatened with private insolvency or has already been declared insolvent, he or she doesn’t necessarily have to vacate the position. Normally, the GmbH remains unaffected by the managing director’s private insolvency proceedings. The employment relationship and the position of the managing director do not necessarily have to be terminated. However, the trustee of the managing director could terminate the contract. The salary of the managing director is seized only in exceptional cases where existing company shares are also seized.

More on the GmbH managing director

CEO/Managing Director

• How much is a GmbH CEO allowed to earn?
• The responsibilities of the GmbH’s CEO
• The GmbH managing director’s contract

Master list of all articles on starting a company

• Master list: Company Formation