Managing Directors and Shareholders — German GmbH Law

Managing directors and shareholders — the legal distinction

Shareholders hold interests in the GmbH and take the key decisions at the shareholders’ meeting: profit distribution, amendments to the articles, capital measures, appointment and removal of the managing director. In principle, only the company’s assets are liable for the GmbH’s obligations; personal liability of shareholders arises only in specific circumstances, such as unpaid contributions, personal guarantees or conduct giving rise to personal liability.

Managing directors represent the GmbH externally under § 35 GmbHG and manage its affairs subject to the law, the articles, applicable rules of procedure and permissible shareholder instructions. Internal restrictions on management authority generally do not limit the managing director’s statutory power to represent the company towards third parties. Managing directors are personally liable to the company for culpable breaches of duty under § 43 GmbHG. Their position rests on two legally separate relationships: the corporate appointment (organschaftliche Bestellung), which establishes the corporate office and statutory power of representation, and the service agreement (Anstellungsvertrag), which governs remuneration, duties, benefits, termination and other contractual matters.

Many GmbHs have a shareholder-director — one person who both holds interests and runs the company. This dual role raises specific questions as to remuneration, pension commitments, non-competition obligations, the right to give instructions and liability. The precise arrangement has corporate, tax and, where relevant, immigration consequences.

The managing director service agreement

A managing-director service agreement is generally a service contract rather than an ordinary employment contract. The classification may nevertheless differ for particular purposes under labour, social-security, tax, EU and immigration law.

Typical provisions address the scope of duties, internal decision-making authority, reporting obligations, consent requirements of the shareholders’ meeting, applicable corporate representation arrangements, remuneration including any variable component, non-competition obligations during and after the appointment, and provisions for termination and severance. Pension commitments to shareholder-directors require particular tax review: the terms must be clear, agreed in advance, appropriate and capable of being earned, and the company must be able to finance the commitment. Otherwise the commitment or related expense may be treated wholly or partly as a hidden profit distribution (verdeckte Gewinnauschüttung). Tax structuring should be coordinated with a tax adviser.

We draft managing director service agreements for new and existing GmbHs and review existing agreements for gaps and liability risks. Related page for the immigration dimension: managing director residence permit.

Managing director liability under § 43 GmbHG

Under § 43(1) GmbHG, managing directors must exercise the care of a prudent businessperson in the affairs of the company. A culpable breach that causes loss to the company may result in personal liability to the company under § 43(2) GmbHG. This internal liability may also apply to a shareholder-director.

Separate personal liability towards third parties may arise under other provisions. Payments made after the company has become illiquid or overindebted within the meaning of insolvency law may expose the managing director to personal liability under § 15b InsO, unless the payment is compatible with the care of a prudent and conscientious manager. Separate personal tax liability may arise under §§ 34 and 69 AO where the managing director intentionally or through gross negligence breaches the company’s tax obligations. Further personal liability risks arise from breaches of accounting obligations, violations of non-competition obligations and conflicts of interest between the company and a shareholder.

The decision to assert the company’s claims against a managing director generally falls within the shareholders’ competence under § 46 no. 8 GmbHG. The shareholders’ resolution should also address who will represent the company in the dispute. Exceptions and alternative enforcement mechanisms may require separate assessment, particularly in insolvency or deadlock situations. The statutory duties under § 43 GmbHG apply to both external and shareholder-directors. Differences may arise from control rights, conflicts of interest, remuneration arrangements, tax treatment and the factual allocation of responsibilities. We advise managing directors on preventive liability management and in specific liability situations.

Removal and resignation

Under § 38(1) GmbHG, the appointment may generally be revoked at any time, without prejudice to contractual compensation claims. The articles may restrict revocation to cases involving good cause under § 38(2) GmbHG.

Removal from office does not itself terminate the service agreement. Conversely, termination of the service agreement does not automatically remove the managing director from office. Separate corporate and contractual measures may therefore be required. Whether and to what extent remuneration claims continue depends on the contract, any notice given, any release from duties and possible grounds for immediate termination.

In practice, the decoupling of the corporate appointment from the service agreement is frequently underestimated. A managing director who is removed loses access to the company — the question of what happens to the service agreement is legally independent and must be resolved separately. Managing this situation requires legal advice on both sides.

A managing director may generally resign from office by declaration to the competent corporate body. The effectiveness of the resignation must be distinguished from possible contractual liability. A resignation in breach of contractual duties may give rise to damages, and an abusive resignation may be ineffective in exceptional circumstances.

Employee participation — ESOP, VSOP and § 19a EStG

Employee equity plans may involve direct shares or options to acquire shares. An option does not itself confer shareholder status; shareholder rights arise only once shares have been validly acquired. Transfers of GmbH shares and agreements creating an obligation to transfer them may trigger the notarial-form requirements of § 15 GmbHG. Employee participation schemes are gaining prominence in the German Mittelstand and among start-ups. The reforms introduced through the Future Financing Act (Zukunftsfinanzierungsgesetz, ZuFinG, in force since December 2023) expanded the potential application of § 19a EStG to qualifying employee equity structures. They did not place virtual participation plans within the provision.

A VSOP (Virtual Stock Option Plan) replicates equity participation contractually — without actual shareholding, conferring a payment entitlement on exit. Purely virtual participation rights under a VSOP are contractual payment claims and do not constitute qualifying equity interests under § 19a EStG. They therefore do not benefit from the § 19a tax deferral merely because their value is linked to an exit or company valuation.

§ 19a EStG may defer taxation only where qualifying actual equity is transferred to an employee free of charge or at a discount in addition to the salary otherwise owed, provided the statutory company, participation and employee-consent requirements are met. The mere grant of an option without a transfer of qualifying equity is not sufficient. The provision is subject to statutory size and age thresholds for the employer or qualifying group and requires the employee’s consent for application in the payroll procedure. The company must therefore verify eligibility before promising a particular tax treatment. The deferred employment-tax amount generally becomes taxable when the participation is transferred in whole or in part, 15 years after the qualifying transfer, or when the employment relationship with the former employer ends. Under § 19a(4a) EStG, the 15-year and termination events may be deferred further where the employer makes the required irrevocable liability declaration. The tax structuring should be coordinated with a tax adviser — we handle the corporate law side.

Shareholder exclusion and dispute resolution

Shareholder conflicts frequently arise at the interfaces of strategy, remuneration, succession or ownership structure. Redemption of a share under § 34 GmbHG is available only where the articles authorise it. A compulsory redemption without the affected shareholder’s consent requires that the relevant grounds were already contained in the articles before the shareholder acquired the share. Capital-maintenance requirements and the compensation consequences must also be observed.

Exclusion of a shareholder for good cause, compulsory redemption, compulsory transfer and an agreed separation are distinct legal mechanisms. The available route depends on the articles, the seriousness of the conduct, proportionality, procedural requirements and the treatment of the affected share and compensation claim. Exclusion for good cause may also be pursued under general corporate-law principles, but is an exceptional remedy and requires careful procedural and proportionality analysis.

We advise companies, shareholder groups, managing directors or affected shareholders in conflict situations — never parties with conflicting interests in the same matter.

Advice in Hamburg

We advise managing directors and shareholders in Hamburg on service agreements, liability, removal, employee participation and disputes — as a boutique commercial law practice with a focus on GmbH structures and international mandates. In German and English.

Advice is provided by Alexander Kagan, admitted as a German Rechtsanwalt and a member of the Hanseatic Bar Association Hamburg (Hanseatische Rechtsanwaltskammer Hamburg).

The content of this page is general information only and does not constitute legal advice. The corporate law assessment depends on the circumstances of the individual case.