The Managing Director Service Agreement in Germany

What is a managing director service agreement, and what is it not?

With the GmbH managing director, two legally separate steps come together. The first is the appointment as a corporate officer (Bestellung) under section 6 GmbHG (German Limited Liability Companies Act, GmbH-Gesetz, GmbHG), a corporate-law act that creates the authority to represent the company externally and is entered in the commercial register.

The second is the engagement (Anstellung) through the managing director service agreement, which orders the internal contractual relationship, that is, remuneration, duties, term and termination. This distinction is known as the separation principle (Trennungstheorie) and has tangible consequences: removal ends the corporate office but does not automatically terminate the service agreement. The agreement must be terminated separately, settled or linked to the office through an effective coupling provision.

The agreement is a service agreement for the conduct of business under sections 611, 675 BGB. The Federal Labour Court (Bundesarbeitsgericht, BAG) treats the third-party (non-shareholder) managing director (Fremdgeschäftsführer) as an employee only in narrow exceptional cases, for instance where the company also dictates the specific manner of the work in detail and thereby removes any entrepreneurial latitude. The normal case remains the independent service agreement. There is no general statutory form requirement. For evidentiary, tax and governance reasons, however, the agreement should always be in writing and supported by a proper shareholder resolution.

Is a managing director service agreement necessary?

A written managing director service agreement is not strictly required. The corporate office arises through the appointment, not through the service agreement, and a GmbH is capable of acting even without a fully drafted agreement. Anyone who forgoes it, however, leaves the central questions to the default statutory rules and to later interpretation. Without an agreement there is no reliable basis for the level of remuneration, the profit-related bonus (Tantieme), leave, secondary activities, non-compete cover or notice periods, and in a dispute the court decides on the basis of general principles, not on the basis of the parties' intentions.

For a controlling shareholder-managing director, there is an additional tax reason. Remuneration and benefits need to be agreed clearly, in advance and with civil-law effect and must be implemented as agreed. If the agreement is missing or carelessly drafted, treatment as a hidden profit distribution (verdeckte Gewinnausschüttung), with corresponding back taxation, threatens. The agreement is therefore not a formality but the basis of tax recognition. It is not legally necessary, but in practice it is barely dispensable.

What must a managing director service agreement contain?

A sound managing director service agreement expressly covers the following points. Each one regularly becomes a point of dispute in practice if it is missing or imprecise.

Duties and representation. The scope of management, the allocation of portfolios where there are several managing directors, consent requirements for extraordinary transactions and alignment with the articles, rules of procedure and any required exemption from section 181 BGB.

Remuneration and bonus. The fixed salary, its due date, continued payment of salary in the event of illness, and the calculation of any profit-related bonus. The bonus should be linked to a verifiable metric, agreed before the relevant period and structured to satisfy an arm's-length test. The calculation base, loss carry-forwards, exceptional items and any cap should be stated expressly.

Ancillary benefits. A company car including private use, subsidies towards health and pension insurance, occupational pension provision, and the promise of a D&O policy for the office-holder's liability.

Non-compete cover. A contractual prohibition during the term and, if desired, a post-contractual non-compete covenant with a clear limit in subject matter, geography and time.

Term and termination. A fixed or open-ended term, ordinary notice periods, the right to extraordinary termination, and any link clause (Kopplungsklausel) that ties the agreement to the corporate office.

Severance and cut-off periods. Provisions on severance in the event of early termination, and cut-off periods within which both sides must assert their claims.

These points are only the core. D&O cover, division of responsibilities, compliance duties, data protection, intellectual property, change of control, indemnification, garden leave and return of company materials may also require express provisions. Its concrete form depends on whether the person is a third-party managing director or a participating shareholder-managing director, because social security, tax and negotiating position differ considerably.

How does a managing director service agreement differ from an employment contract?

The difference is more than one of terminology, because it decides the managing director's protection. An employee is bound by instructions and enjoys the full protection of employment law. The managing director acts as a corporate officer and is bound by law, the articles, shareholder resolutions and lawful shareholder instructions. The employee-style personal dependency and integration will generally be absent, which is why employment-law protection applies only to a limited extent.

In legal terms, the employment contract is an employment relationship under section 611a BGB, whereas the managing director service agreement is an independent service agreement under sections 611 and 675 BGB. For the employee, the KSchG applies once the relevant company size and waiting period are reached; for the managing director it does not apply at all, under section 14 (1) no. 1 KSchG. The legal route also differs: disputes arising from the employment relationship are heard by the labour court, whereas those arising from the service agreement are, as a rule, heard by the ordinary courts.

For statutory leave, the employee is governed by the Federal Leave Act (BUrlG), while the managing director must in principle provide for leave by contract; for third-party managing directors, however, the Federal Labour Court (BAG) has held that they may claim the minimum leave under the BUrlG as employees in the EU-law sense. The employee's post-contractual non-compete is governed by sections 74 et seq. HGB and requires mandatory non-compete compensation; these provisions do not apply to the managing director, so that the scope and the payment for any restraint can be freely negotiated.

For a third-party managing director, contractual protection is particularly important: the corporate office may generally be ended by removal, while statutory protection against dismissal will normally not apply. This is precisely why notice periods, severance provisions and a fair termination clause belong in the agreement, not as an accessory but as the actual subject of negotiation.

Who draws up a managing director service agreement, and who signs it?

Two questions are often confused here. The drafting, that is, the substantive draft, is in practice handled by a lawyer specialising in corporate law, whether on behalf of the company or of the managing director. Templates from the internet or from contract generators cover the standard case but fail precisely where matters become expensive: social-security status, bonus calculation, non-compete cover and the link clause. A template is a starting point, not a finished agreement.

The conclusion, that is, the signature on the company's side, does not lie with the managing director at a GmbH but with the shareholders' meeting (Gesellschafterversammlung). Under section 46 no. 5 GmbHG the shareholders decide on appointment and engagement, and this competence, by ancillary competence, also covers the conclusion, amendment and termination of the service agreement.

On the basis of a shareholders' resolution, an authorised shareholder or a further managing director regularly signs for the company. In a single-member GmbH where the sole shareholder is also managing director, a self-dealing issue may arise. Representation, any exemption from section 181 BGB, the shareholder resolution and the written record need to be aligned. Defective authority or documentation can jeopardise both effectiveness and tax recognition.

When is the managing director exempt from social security?

The social-security classification is the most expensive source of error. The third-party managing director without a participation is in principle in dependent employment and therefore subject to social security. With the shareholder-managing director, controlling power is decisive.

Under the settled case law of the Federal Social Court (Bundessozialgericht, BSG), what matters is whether the managing director can determine the company's affairs through the shareholders' meeting, or can prevent instructions that are not to their liking.

A shareholder-managing director will generally not be in dependent employment if they hold at least 50 per cent of the share capital or, with a smaller interest, have a comprehensive blocking minority embedded in the articles. The legal power must extend to all material shareholder decisions and may not be restricted to individual topics.

A holding of exactly 50 per cent will generally provide the necessary blocking power because resolutions cannot be adopted against that shareholder, unless the articles create a different mechanism. The specific articles remain decisive. Voting agreements, contractual vetoes and practical influence will generally not suffice if they do not provide the required corporate-law power.

Anyone relying on exemption from social security should therefore secure the controlling power in the articles of association and, in case of doubt, initiate a status determination procedure (Statusfeststellungsverfahren) under section 7a SGB IV (Book IV of the German Social Code, Sozialgesetzbuch IV, SGB IV).

Binding clarification costs little compared with the risk of having to pay contributions retroactively after years, as a rule for four years, and in the case of deliberate withholding even up to 30 years.

Beyond social security and controlling power, further differences remain. Protection against dismissal under the KSchG does not apply in either case, whether to the third-party or to the shareholder-managing director. The tax risk is low for the third-party managing director, whereas for the shareholder-managing director unclearly arranged remuneration can be treated as a hidden profit distribution (verdeckte Gewinnausschüttung). The contractual focus shifts accordingly: for the third-party managing director, termination and severance are the key clauses, while for the shareholder-managing director it is remuneration, the bonus and the safeguarding of controlling power.

What does a managing director service agreement cost?

The cost question can seriously be answered only in ranges, because the effort depends on the complexity. A lawyer bills either under the German Lawyers' Remuneration Act (Rechtsanwaltsvergütungsgesetz, RVG) or on the basis of a fee agreement.

When billing under the RVG, the fee is measured by the value of the matter, which depends on the level of the payments; the higher the agreed annual remuneration, the higher the business fee under no. 2300 VV RVG. In practice, however, many firms work with a fixed price agreed in advance for such agreements, because it is calculable for the client. The following ranges are non-binding guide values based on customary market prices for the legal work, each net; the agreement in the individual case always governs.

Reviewing a submitted draft agreement typically costs 300 to 900 euros, drafting a standardised agreement 600 to 1,500 euros, and individual drafting with bonus, non-compete and status check 1,800 to 4,500 euros. Complex constellations with several managing directors, a group dimension or a participation start from 4,500 euros.

A notary is not required for the managing director service agreement itself, as it is free of form. Notarisation costs arise only where the articles of association are amended at the same time or a participation is transferred. The cost of an individually drafted agreement is small compared with the sums at stake when social-security status, bonus or non-compete cover later fail. A defective status can trigger back-claims for contributions in the five- to six-figure range; an ineffective non-compete covenant releases a departing managing director to the competition. Reviewing a draft on hand before signing is therefore the cheapest safeguard.

How do you get out of a managing director service agreement?

Termination follows the separation principle and runs on two levels. At the corporate-office level, the shareholders' meeting can in principle remove the managing director at any time under section 38 GmbHG. At the contract level, the engagement ends only through termination, a cancellation agreement or the expiry of the term.

A fixed-term agreement runs out at the end of the term and can be terminated on ordinary notice only where that was expressly agreed. An open-ended agreement can be terminated on ordinary notice with the agreed period; if no provision exists, the statutory period is disputed.

The Federal Labour Court applies section 621 BGB to the third-party managing director as an independent service provider (judgment of 11 June 2020), whereas the Federal Court of Justice (Bundesgerichtshof, BGH), for the managing director who does not hold a majority participation, holds to the analogous application of the longer section 622 BGB (judgment of 5 November 2024). For good cause, either side can terminate extraordinarily under section 626 BGB.

Managing director agreements may be fixed-term or open-ended depending on the parties' interests. A coupling clause can link the service agreement to the corporate office: if the managing director is removed, under the clause the engagement also ends, though at the earliest on the next permissible date of termination.

Anyone who wants to give notice themselves should check the contractual periods precisely before acting. With the post-contractual non-compete covenant, caution is called for: the Federal Court of Justice confirmed, by judgment of 23 April 2024 (II ZR 99/22), that agreed non-compete compensation (Karenzentschädigung) can lapse retroactively if the managing director breaches the prohibition.

Conversely, such a prohibition can be effective for corporate officers even without non-compete compensation, because the protective provisions of sections 74 et seq. HGB (German Commercial Code, Handelsgesetzbuch, HGB) do not apply. Limits arise in particular from section 138 BGB and the freedom of occupation under Article 12 of the Basic Law. The covenant must protect a legitimate business interest and be reasonable in scope, geography and duration; a period exceeding two years will generally require particular justification.