The status of the managing director

Any natural person of full legal capacity aged 18 or over may be appointed as managing director. The person selected may be a third party from outside the company, but it is equally possible for him to be one of its shareholders. In a single-shareholder company, the sole shareholder appoints himself as the sole managing director.

No final judgment must have been passed against the candidate for an insolvency offence (bankruptcy, a violation of the duty to keep records, fraudulent preference of creditors or debtors, etc.) or another criminal offence such as fraud or breach of trust (Art. 6 para. 2 GmbHG). Other reasons for rejecting a potential managing director include cases where a final judgment has been issued for

The managing director does not, per se, have to possess any special qualifications. If the activities of the managing director require him to be issued with a licence or permit for which a personal aptitude is required for the activity in question, however (e.g. a qualification as a master craftsmen), only a suitably qualified managing director may be appointed. Neither must the managing director have been prohibited from practising a trade or profession in which the GmbH is involved.

Neither is there anything to prevent a foreigner from being appointed as managing director. He does not have to live in Germany or in the EU, or to have a permanent right to reside there. If he is to manage the company from Germany, he must ensure that the necessary residence permit or work permit does not prevent him from practising the trade in question. If he is to manage the company from abroad, he should ensure that he complies with the statutory regulations of the Aliens Act and that he has no problems entering the country. Under certain circumstances, it may make sense to appoint an additional managing director in Germany.

The managing director is usually appointed by resolution of the general meeting. However, the memorandum of association may transfer the right to appoint him to another body. The managing director may be removed from his post by the body specified in the memorandum of association at any time and without notice. His appointment and removal as well as any changes in the managing director’s authority to represent the company must be entered in the Commercial Register.

According to the GmbHG reform, the shareholders are liable to the company for any loss or damage caused by a managing director who did not meet the requirements for the post (Art. 6 para. 5 GmbHG).

A distinction is to be drawn between the managing director’s status as a corporate body and the contract under the law of obligations which relates to his employment. The managing director’s rights and duties as a corporate body derive from the terms of his engagement, and can be altered only by the articles of incorporation or a resolution pursuant to the memorandum of association, and not by the terms of a contract. The contract relating to his employment, on the other hand, generally governs such matters as his salary, and possibly also his pension and similar conditions. It can be terminated with or without notice pursuant to the general rules.

The managing director generally signs a self-employed service contract with the GmbH, rather than an employment contract. This will be the case if a managing shareholder plays an important role in managing the finances of the company (especially if he owns a majority shareholding). But even managing shareholders who own less than fifty percent of the share capital should be regarded as self-employed if they are not bound by the instructions of a superior. In Germany, the self-employed are not generally subject to mandatory social security contributions (pension, health and unemployment insurance). Voluntary continued insurance under the statutory health insurance scheme is possible for former employees. There is also the option of applying for compulsory or voluntary insurance under the statutory pension scheme. In some sectors, entrepreneurs are also subject to compulsory insurance under the statutory accident insurance scheme (Employers’ Liability Insurance Associations) even if they do not employ any staff. Voluntary insurance is possible for those who are not obliged to make contributions. For tax purposes, managing shareholders are treated as self-employed.

If a managing director is not also a shareholder (i.e. hired externally), and consequently cannot manage the company’s financial affairs independently, an employment contract may be concluded. In such cases, he will be obliged to pay social security contributions towards pension, health and unemployment insurance. Outside managing directors must also pay income tax.