Liability in Limited Liability companies
It might seem counterintuitive, but you may face unlimited liability in a German Limited Liability Company (GmbH and UG) – at least if you are its Managing Director (MD). In fact, MDs are exposed to countless personal risks of civil and even criminal liability. You can encounter anything from a modest fee to years of jail time. The least you may worry about is your company firing you as a MD. Certain criminal offences will ban you from regaining that post for a long time anyways.
Learn about managing director liability in this video
A. Flawed or abused representation
- Make sure that the other side understands you are dealing on behalf of a Limited Liability Company and not as a private person.
- Never mix up personal interests or affairs with your business dealings: your contracting partner may hold you liable if you abuse the personal trust he puts in you and your statements. This is especially true for investors’ prospect statements. Likewise, he may claim any damages from you arising out of the contract if you have a personal interest in the contract’s outcome.
- If you are the MD of a UG (haftungsbeschränkt), you must call the company by its proper name and not refer to it as a GmbH. Otherwise, you may have to pay the difference in share capital in damages of up to 25,000 Euros out of your own pockets.
- Likewise, the chamber of commerce may fine you if you make any wrong representations of the basic company data in business letters and other official documentation.
- If you are not allowed to close a contract on your own but do so regardless, you will be personally accountable for any damages.
- Any major abuse of your power of representation will be persecuted on top of all civil claims being made.
B. Trust violations
C. Duty violation, § 43 GmbHG
- Make an informed decision,
- weigh the pros and cons reasonably,
- act only out of the company’s interest and not your own, and
- do not break the law.
D. Legal obligations: Financial Monitoring
E. Legal obligations: Organization
F. Top 6 tips on how to avoid liability as a Managing Director
- Ask the company’s shareholders for permission before taking risky decisions or upon implementing a new organization.
- Ask the company’s shareholders for an annual discharge from liability, especially for approval regarding accounting, balance sheet and financial statement.
- Get a D&O insurance (Directors and officers) to cover all basic negligent risks. Include a clause in your employment contract that obligates the company to effect such an insurance.
- Include a clause in your employment contract or the company’s bylaws that limits your liability to intent and gross negligence. Alternatively include a cap that limits your maximum sum of liability.
- In your employment contract, set a period of limitation of a maximum of 2 years outside the mandatory scope of Sec. 43 para. 3, 64 GmbHG (Limited Liability Companies Act).
- Get professional financial and legal assistance (accountants and lawyers), especially regarding your financial statements and in times of crisis and bankruptcy.
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