The deciding factor: dependent on instructions or not
The law does not explicitly govern whether or not the managing director of a GmbH is subject to social security contributions. Section 7(1) of the German Social Security Code Book IV (SGB IV) provides the following general statement: “Employment is non-self-employed work, in particular in an employment relationship. Indications for employment are an activity subject to instructions and integration into the work organization of the authority issuing the instructions.”
Building on this, case law assumes that a social security obligation for the managing director of a GmbH exists if their employment relationship is subject to instructions. The Federal Social Court has established abstract criteria to evaluate the issue.
External managing directors: Social insurance is mandatory!
In many cases, the managing director is not a shareholder in the GmbH. Instead, they are employed solely on the basis of a service contract.
Even if a portion of their remuneration depends on profits and losses, courts regard these third-party managing directors as subject to instructions from the shareholders’ meeting. Therefore, they are considered to be “employees” pursuant to social security law. They cannot prevent decisions by the shareholders that are detrimental to them.
This applies even if
- the managing director essentially works largely independently and without instructions, if the shareholders only exercise a limited right of instruction,
- or if the articles of association stipulate restrictions on the right of instruction,
- or if the managing director is authorized as a sole representative of the company by a provision in the articles of association or is entitled to appoint such a managing director or can only be dismissed for due cause (Federal Social Court of Germany (BSG), decision dated 01.02.2022, Ref.: B 12 KR 37/19 R),
- or if instructions are not issued to the managing director of the family business due to family ties.
Managing Partner or Director: Social insurance? It depends!
The legal situation may differ for managing partners.
Due to the fact that these managing directors
- own shares in the GmbH or
- have their own provisions in the articles of association
and exercise extensive influence on the fortunes of the GmbH, the managing partner in such a constellation may be regarded as not being subject to instructions and, therefore, independent. In this case, there are also not subject to social security obligations.
When assessing this issue, the extent of the managing partner’s actual capital participation plays a role:
Managing director = majority shareholder
If the managing director holds 50% or more of the shares in the GmbH, they can exert a significant influence on the decisions of the GmbH. This is because resolutions passed by the shareholders’ meeting are generally adopted via a simple majority. Resolutions are impossible without the managing partner’s vote.
In this case, the actual legal influence of the managing director as the majority shareholder means that the managing partner is not subject to social security obligations.
Managing director = minority shareholder
Following this reasoning, managing partners who hold less than 50% of the shares in the GmbH are mostly subject to social security contributions. However, there are exceptions.
If a managing director is a minority shareholder who possesses a blocking minority according to the articles of association, they are capable of preventing resolutions by the other shareholders from being passed, regardless of the extent of their voting shares. The blocking minority provides the managing partner with a similar legal power to a majority shareholder.
Accordingly, a managing partner who is a minority shareholder with a comprehensive blocking minority is also not subject to social security contributions.
Conversely, without a comprehensive blocking minority, a managing partner with a minority shareholding would be regarded as subject to instructions and, therefore, “dependent”, which means that they are also subject to social security contributions.
The specific constellation is decisive
Whether the managing director of a GmbH managing is required to pay social security contributions depends on objective factors.
In the case of shareholder-managing directors, the obligation to pay social security contributions is generally determined by their share in the GmbH and any eventual provisions in the articles of association governing blocking minorities.
Actively address and clarify in the articles of association
Ultimately, a status determination procedure carried out by the German Pension Insurance Association is the only means of gaining legal certainty as to whether a social security obligation exists. The status determination procedure for managing partner is mandatory once they begin their new role. The process is initiated by the collecting authority when they register for social insurance.
Given the clear (albeit unconvincing) criteria for assessing a managing director’s social security status, considering this issue during the process of founding a GmbH is more important in order to regulate the matter in the articles of association in line with the specific wishes and requirements. Nevertheless, the social security obligation needs to be considered in context. The key lies in balancing the interests. This protects the GmbH and also the managing director, who bears the responsibility for registering with the social insurance authority. In the worst case, they are protected against considerable additional claims from the social insurance against the GmbH along with claims for damages by the GmbH.