When starting a business, a legal structure must be chosen for the new company. The GmbH is particularly popular among entrepreneurs. Anyone wishing to establish a GmbH needs a legal representative for the company. The GmbH managing director represents the company vis-à-vis the shareholders and third parties, both in and out of court. This power of representation cannot be restricted in external relations. The managing director therefore has various duties, but also rights. In this article, you will learn what rights a GmbH managing director has and how far-reaching their duties are.
What rights do managing directors of a GmbH have?
Looking at the GmbH Act, while the managing director has many duties, one will search in vain for his or her personal rights. The law actually describes only the managing director’s duties, but not his or her rights to, for example, vacation or compensation. These points must be regulated individually in an employment contract.
Rights under the employment contract
Employee protection rights generally do not apply to the managing director. Therefore, the following points should be specified in the employment contract:
- Salary
- Bonus
- Company car
- Reimbursement of expenses
- Continued pay during sick leave
- Contribution to private health and accident insurance
- Contribution to private retirement savings
- Vacation entitlement
- Entitlement to parental leave
- Rights under the Maternity Protection Act
- Details regarding termination provisions (notice periods, formalities, and severance pay, etc.)
- Entitlement to a job reference
- Taking out financial loss insurance in favor of the managing director at the expense of the GmbH.
The rights under the employment contract are independent of the status as managing director of the GmbH. For example, the appointment as managing director can be revoked at any time, while this does not automatically lead to the termination of the employment contract. A separate notice of termination is required for this.
Contracts between the GmbH and the managing director (transactions with oneself)
It is generally prohibited to enter into transactions with oneself. The so-called prohibition on self-dealing also applies to transactions in which the managing director is a party to the contract. An exemption from this prohibition must be stipulated in the articles of association for a sole shareholder-managing director. Otherwise, a resolution by the shareholders is sufficient. Permission for such self-dealing transactions must also always be entered in the commercial register.
What are the duties of a GmbH managing director?
As a managing director of a GmbH, you must comply with various duties. The company’s business must always be conducted with due care and in compliance with these duties. In the event of a breach of duty, the managing director may be held personally liable. Therefore, managing directors should not take their duties lightly. There are a wide variety of duties across various areas of the GmbH. Below, we will briefly explain all the important duties.
1. General Duties
Fiduciary Duty
Due to their position and authority, managing directors are subject to a special duty of loyalty. This duty naturally applies for the entire duration of their tenure and may, in some cases, extend beyond that period. The managing director must always ensure the fulfillment of the company’s purpose. In doing so, they must implement the company’s objectives and always utilize economic advantages for the benefit of the company. Additionally, the managing director must maintain confidentiality regarding trade secrets. The duty of loyalty also includes a non-compete clause.
Duty of Care
In the conduct of business, the care of a prudent businessman must be exercised. Decisions should therefore always be made objectively. A lack of knowledge on the part of the managing director does not affect the standard of duty.
Examples of breaches of the duty of care:
- Failure to utilize financial advantages
- Entering into unfavorable contracts
- Lack of oversight
Risk prevention measures
Potential risks to the GmbH must be identified and documented early on. Managing directors must therefore keep themselves informed at all times about the company’s financial and economic situation. If there are potential risks to the company, the managing director must take appropriate precautionary measures. Failure to do so may result in personal liability in the event of a loss. In addition, the managing director must also address insurance matters and ensure that these policies safeguard the company’s continued existence.
Product and environmental liability also fall under the managing director’s risk management responsibilities. Contract review also falls within this scope of duties. Good risk management is therefore an important duty of the managing director.
2. Duties under corporate law
Formal duties
The managing director must oversee various formal aspects of the company. He must register the following with the commercial register:
- the company
- the managing directors
- the articles of association, including any amendments
- capital increases/decreases
- the rules of representation
Of course, any recent changes must also be noted there. In addition, the managing director must review all business correspondence addressed to the GmbH. This includes emails, quotes, order forms, acknowledgments of receipt, price lists, and invoices. These must always contain the following information:
- Legal form of the company
- Registered office of the company
- The company’s registry court
- The number under which the company is registered in the commercial register
- Managing Director’s last name and at least one first name written out in full
Monitoring of the obligation to make capital contributions and capital maintenance
When a GmbH is established, it is often the case that the full share capital is not paid in initially. This is only required following a corresponding resolution by the shareholders. However, the managing director is obligated to demand payment of the outstanding capital contributions immediately after the resolution is passed. If this is neglected, he may be held liable as managing director in the event of insolvency.
In addition, the managing director is obligated to ensure capital maintenance. Therefore, the assets required to maintain the share capital may not be distributed to the shareholders. It would also constitute a violation if the shareholder-managing director is paid an excessive salary (disguised profit distribution).
The managing director is therefore obligated to continuously monitor the GmbH’s liquidity and avoid payments that could lead the company into financial distress.
Right to Information
Any shareholder may at any time request information regarding the legal and financial circumstances of the GmbH and inspect the books and tax records. This right to information covers all matters pertaining to the GmbH. Although the claim is directed against the GmbH, it must be fulfilled by the managing director.
Even without being asked, the managing director must inform the shareholders about important current issues. There must be no secrets between the two parties.
Shareholders’ Meeting
It is the managing director’s responsibility to formally convene shareholders’ meetings. This must occur at least once a year for the purpose of approving the annual financial statements. In certain cases, this must also be done at the request of a shareholder. The articles of association may also specify when and how often a meeting must take place. The managing director is responsible for ensuring that all shareholders are properly notified.
Accounting
The managing director is responsible for the proper bookkeeping of the company. He is therefore responsible for ensuring that bookkeeping obligations are met. This includes the obligation to record business transactions, to prepare inventories, to draw up the opening balance sheet, the annual financial statements, and the management report, as well as to disclose the annual financial statements.
3. Tax Obligations
The managing director’s tax obligations are governed by the German Fiscal Code. First, the managing director must report the formation and registration of the GmbH to the tax office. All tax returns must be personally signed by the managing director. By signing, he certifies to the tax office that the information has been provided to the best of his knowledge and belief.
Managing directors should not neglect their tax obligations. This is because they are personally liable for the company’s tax debts.
In addition, the managing director must ensure that payroll tax for any employees is always paid correctly. If payroll tax is not paid on time, this constitutes gross negligence on the part of the managing director. The same applies to sales tax.
4. Social Security Obligations
Similar to tax obligations, employee social security contributions must also be paid to the relevant collection agencies by the due date. If this does not happen, the managing director is liable to prosecution. Here, too, the managing director is always personally liable.
5. Obligation to File for Insolvency
If the GmbH becomes overindebted or its solvency is impaired, this constitutes grounds for insolvency. Often, the shareholders do not want to file for insolvency. Nevertheless, the managing director must comply with the obligation to file for insolvency. Accordingly, even if the shareholders do not want to, the managing director must file for insolvency if grounds for insolvency exist. If he fails to do so, the managing director risks criminal consequences. In addition, creditors may hold him personally liable if they are unable to recover any funds from the GmbH due to the delay in filing for insolvency.
Any questions left?
We must admit that there are a great many obligations for managing directors, and of course we could not cover every topic in detail in this article. Rather, you now have a better overview of what it means to be a managing director. Are you perhaps planning to start a GmbH yourself or would you like to become the managing director of a company? In that case, you should seek advice from an expert beforehand. As tax advisors in Düsseldorf and Oberhausen, we have already helped various start-ups and entrepreneurs make important decisions. Benefit from our diverse industry expertise and schedule an initial consultation with our tax advisors. Our team looks forward to your visit.
