The responsibilities, rights, and remuneration of a Managing Director in s.r.o (LLC)

27.10.2023

Assuming the position of a managing director in a limited liability company (jednatel s.r.o) carries significant responsibilities and expectations. Not everyone is qualified for this role. This article aims to clarify the roles and obligations of a managing director and shed light on the compensation they can anticipate.

Each LLC (s.r.o) is mandated to have at least one managing director, though multiple individuals can assume this role. The extent of their authority is determined by both legal provisions and the company’s charter. There are two primary options regarding the exercise of this authority: either all managing directors act as a collective unit (necessitating unanimous approval for each decision), or each one can individually represent the company.

Managing directors, unless they hold shares in the company, do not possess property rights within the organization and do not inherently participate in the profit-sharing unless explicitly outlined in the agreement. Essentially, Executive Directors function as a category of “manager” with the broad authority to make decisions in the best interest of the company. While the general meeting of shareholders cannot intervene in the day-to-day economic management of the company, it does define the overarching strategies and objectives of the company, such as its core activities and long-term goals.

Defining the role of a Managing Director

A managing director serves as the legal representative of a limited liability company, carrying the responsibility for guiding the company’s operations and acting on its behalf, including the authority to enter into contractual agreements. Additionally, the managing director is required to be officially registered in the commercial register. The appointment and removal of a managing director are decisions vested in the general meeting of the company’s members, who are essentially its shareholders.

Requirements for Managing Directors

The role of a managing director can be assumed either by an individual or a legal entity, provided that an individual is designated to act as their representative.

An individual appointed as a manager or as the representative of a legal entity must satisfy the following requirements:

They must possess full legal capacity and be at least 18 years of age.
They should exhibit good faith and not be encumbered by any impediments that would hinder the fulfillment of their duties, as outlined in Section 46 of the Business Corporations Act.
They cannot be a member of the company’s supervisory body.
No prior decisions to dismiss them from office should have been executed in accordance with §63 of the Companies Act.

Restrictions on the Functions of the Managing Director

The law includes provisions outlining situations where a managing director may be incapable of fulfilling their responsibilities, even if they meet all the previously mentioned requirements. Such situations can encompass, for instance, legal prohibitions on specific activities or the company’s declaration of bankruptcy.

Moreover, it’s important to note that the managing director is subject to a non-compete clause, unless otherwise expressly stated in the company’s articles of association. This non-compete clause entails that the managing director is restricted from:

Independently engaging in the same or similar business activities.
Serving as a member of the statutory body of another company operating within the same industry.
Becoming an unlimited partner or holding a controlling position in a competing enterprise

In the event of a conflict of interest, it is incumbent upon the managing director to notify both the other managing directors and, if applicable, the Supervisory Board or the General Meeting of Shareholders. Subsequent steps will be determined by the decisions of these relevant parties.

Managing director responsibilities

The managing director’s primary task is to manage work processes with the appropriate loyalty and competence. Such duty fulfillment is referred to as proper and is detailed in certain circumstances, most notably in rulings of higher judicial authorities.

The managing director does not need to be an expert in every aspect of the business, but he must know when it is necessary to seek the advice of an expert (such as a tax consultant, lawyer, or other consultant). If he does not do this, he will be unable to defend himself later by claiming that he lacked the essential knowledge. Even if there is a liability disclaimer, the controlling director is still liable for damage committed to the organization by negligence.

The Labor Code and the Civil Code are primarily responsible for governing the managing director’s obligations.

The following are the primary responsibilities of the managing director:

maintains established records, accounts, and shareholder lists;
informs shareholders about the state of affairs in the company upon their request;
holds a general meeting of shareholders at least once a year;
organizes the registration of the company in the register of beneficial owners;
submits a proposal to register changes in data about the company in the Trade Register; and, in the case of changes to the charter, enters the current version of the charter into the documents.

The managing director’s primary task is the so-called care of a good manager. The manager is required by law to do his tasks “with the necessary loyalty, knowledge, and care.” This means he must act deliberately and in the best interests of the company.

If he violates this obligation, he is liable for the consequences of his actions. Thus, if a company is in debt as a result of the managing director’s incompetence, the court may order him to pay the debts out of his own pocket.

Obligation to organize a shareholder general meeting

The managing director’s annual responsibilities include convening a general meeting no later than six months after the end of the previous fiscal year. Typically, such a meeting is held on the last day of June because the company’s annual accounts must be considered at the meeting by this date.

The managing director is required to maintain a list of shareholders. When calling a general meeting, he must issue an invitation to shareholders at least 15 days in advance. However, the manager’s connection with shareholders is not limited to the general meeting, as the manager is required to tell shareholders about the company’s affairs even if they do not attend the general meeting.

Responsibility for maintaining accounting records

Section 196 of the Company Law places the managing directors in charge of ensuring appropriate accounting servicing. A limited liability company is required to keep accounting records from the time it is registered in the Trade Register, i.e., when the LLC is formed. As the preceding clause of legislation shows, this does not imply that the managing director must keep the accounting records personally. In practice, managers frequently delegate bookkeeping to a certified public accountant. However, this does not absolve the manager of the responsibility to ensure correct accounting. He is required to monitor the proper preservation of accounting records and, if problems are identified, to immediately remedy them.

Accounting responsibilities include financial statement preparation. In some situations, a company is required to prepare so-called consolidated financial statements to tell the shareholders of a company that owns another company about the state of that company’s or the firms it controls’ assets and liabilities.

Financial statements consist of a balance sheet, a profit and loss statement, and a schedule that explains and supplements the information contained in the balance sheet and profit and loss statement. The managing director must sign the financial statements.

On the last day of the fiscal year, the corporation is expected to prepare sufficient financial statements. The corporation must also prepare an income tax return for annual reporting. Extraordinary financial statements must be prepared, for example, when a company is liquidated.

Interim financial statements are issued when required by law, and they serve simply to determine the company’s assets as of a specific date. Interim financial statements are prepared, for example, when a company’s legal form changes.

Obligation to maintain a list of company shareholders

One of the responsibilities imposed on managing directors by Section 196 of the Companies Act is the duty to maintain a list of the company’s shareholders. This list must contain, at a minimum, the information required by law and should be updated promptly whenever the company becomes aware of changes in registered information.

Throughout a company’s existence, various changes may occur, some of which necessitate entry into the commercial register. Such changes include alterations to the manager’s name, the company’s legal address, shareholder information, and more. The specific facts to be recorded in the commercial register are outlined in the Public Registers Act. Managing directors are obliged to submit proposals for the registration of these changes in the commercial register.

Failure to fulfill the obligation to submit an application for entry into the Trade Register is not only a breach of due diligence but can also result in both civil liability (in terms of compensating the company for any incurred damages) and criminal liability (for misrepresenting the state of the company’s affairs and assets, as stipulated in § 254 of the Commercial Code).

Non-compete clause and conflict of interest for the managing director

Unless expressly allowed in the company’s articles of association, the managing director is prohibited from engaging in business activities in the same field as the company, becoming a member of a competing entity’s governing body, or participating in their activities. This non-compete restriction can be further enforced through a shareholder resolution to amend the articles of association.

If, during their duties, the managing director or individuals closely connected to them find themselves in a conflict of interest with the company’s interests, they must promptly inform the general meeting. In such cases, the general meeting has the authority to temporarily suspend the managing director’s responsibilities. For instance, if the managing director is responsible for an agreement that could be detrimental to the company, they are obligated to disclose this to the shareholders’ general meeting, particularly when the agreement falls outside the company’s regular course of business and involves a potential conflict of interest.

Distinguishing between a Managing Director and a Partner

Many people often mix up the roles of a managing director (jednatel) and a partner (společník), but these two positions have fundamental differences.

In some cases, the managing director can also be a partner, particularly in small companies. However, it’s important to note that the managing director and the shareholder (partner) have distinct roles with separate responsibilities:

The managing director is responsible for running the company, making financial decisions, representing the company, and signing contracts.
On the other hand, the partner is an owner or co-owner who participates in general shareholder meetings but does not act on behalf of the company or sign contracts, unless they also hold the position of managing director.

Managing directors’ compensation

Managing directors typically establish a work contract with the company to define their working relationship in greater detail (distinct from a traditional employment relationship). These contracts outline the managing director’s compensation.

It’s important to note that managing directors are not considered employees of the company. They work without fixed working hours and are available around the clock. A performance contract might set forth the terms of their compensation. In the absence of such an agreement, their compensation is determined in accordance with the law.

Compensation for their role is subject to the same tax regulations as that of employees and is categorized as other earned income. Shareholders have the authority to dismiss the managing director if they are dissatisfied with their performance. Similarly, the managing director, unless it is detrimental to the company, can resign from their position.

Contractual elements of remuneration

A contract dealing with remuneration should include the following:

Clear definition of all remuneration components, including non-monetary benefits and pension contributions.
Specification of the remuneration amount and the method for calculating it.
Guidelines for special remuneration or profit distribution, if mutually agreed upon.
If the contract does not specify remuneration, the performance of the executive director’s duties is assumed to be without charge.

Executive directors’ remuneration is subject to personal income tax, along with health and social insurance contributions, which are to be withheld from their compensation.

It’s worth noting that if a manager breaches their duty of care to employees, a court may order them to pay part or all of the compensation.

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Sources

https://www.jake-james.cz/blog/jednatel-s-r-o-povinnosti-prava-odmena#:~:text=Omezen%C3%AD%20funkce%20jednatele&text=s%C3%A1m%20podnikat%20ve%20stejn%C3%A9m%20nebo,nebo%20ovl%C3%A1daj%C3%ADc%C3%AD%20osobou%20konkuren%C4%8Dn%C3%AD%20firmy.

https://www.pruvodcepodnikanim.cz/clanek/povinnosti-jednatele/

https://www.epravo.cz/top/clanky/prehled-povinnosti-jednatelu-sro-110506.html

https://www.du.cz/33/povinnosti-jednatele-pri-rizeni-spolecnosti-uniqueidmRRWSbk196FNf8-jVUh4EhdXyoq0csj-VoJRElJRJWYCD-vMUnwPlw/