Director of a Commercial Company – Rights, Duties and Liability

A director of a commercial company is not merely a formal head of a company. The director is responsible for managing business operations, making strategic decisions, and achieving the company’s business objectives.

In commercial companies, the director acts as the legal representative of the company. In joint-stock companies and limited liability companies, the director (or multiple directors) is authorized to represent the company, conduct its business, and make decisions that produce legal effects for the company itself.

Regardless of whether the director is also a founder, an employee, or engaged outside an employment relationship, the director’s legal position is always dual:

• internally – the director manages and represents the company;

• externally – the director’s actions directly bind the company vis-à-vis third parties.

Ways of Engaging a Director of a Commercial Company

1. Director Employed under an Employment Contract

A director may establish an employment relationship with the company for a fixed or indefinite period. In that case, the provisions of the Labour Law apply, including the rights and obligations applicable to all employees.

Certain specificities apply to directors employed under an employment contract:

• a fixed-term employment contract may last longer than 24 months;

• a person may already be employed by the company and subsequently appointed as director, with the right to return to their previous position upon the expiration of the mandate;

• the director’s remuneration is taxed in the same manner as employee salaries.

A director who is employed by the company may not conclude additional contracts with the same company, as this would constitute an unlawful duplication of legal grounds.

Specifically, a director who has an employment contract with the company may not simultaneously conclude consulting, advisory or similar contracts with the same company if such contracts regulate activities already covered by their employment status and managerial authority.

2. Director Engaged Outside an Employment Relationship (Management Agreement)

A company may also engage a director without establishing an employment relationship, based on a decision of the competent corporate body appointing the director. In such cases, the company concludes an agreement on the rights and obligations of the director (management agreement or director’s agreement).

The key feature of this agreement is the absence of a traditional employer–employee relationship. Instead, the parties are formally equal and freely regulate their contractual relationship.

Such agreements typically regulate:

• remuneration;

• duration of the mandate;

• rights to leave, rest periods and occupational safety;

• duties, responsibilities and grounds for dismissal.

The remuneration of an appointed director is taxed as other income, in accordance with tax regulations.

Although the law does not prescribe a minimum remuneration, tax authorities require that it be realistic and adequate, in order to avoid the appearance of concealed tax avoidance. In practice, symbolic remuneration requires a specifically reasoned decision of the company’s competent body.

Typical Contents of a Management Agreement

Although the Labour Law does not prescribe mandatory elements of a director’s agreement, practice shows that precise regulation is essential for preventing disputes and ensuring a clear allocation of responsibilities between the director and the company.

A management agreement should typically include:

1. Subject of the agreement and description of the function (scope of authority in accordance with the articles of association, statute and decisions of competent corporate bodies);

2. Duration of the mandate (usually aligned with the appointment period, with provisions for termination due to dismissal, expiration of mandate or other contractual grounds);

3. Director’s remuneration (amount, payment method and dynamics, including variable components such as bonuses or incentives);

4. Director’s rights, including:

   • leave and rest periods;

   • reimbursement of expenses (business travel, representation);

   • use of company assets (vehicle, phone, computer);

   • other rights agreed by the parties;

5. Duties and responsibilities of the director, in addition to statutory duties under the Law on Companies, provided they are in accordance with law and public order;

6. Performance criteria and incentives (measurable goals / KPIs);

7. Liability for damages and insurance, including professional liability insurance where applicable;

8. Grounds and manner of termination, including dismissal, notice periods and consequences of termination;

9. Dispute resolution and governing law, including jurisdiction or arbitration and applicable law, particularly where the director is a foreign national.

Employment Contract vs. Management Agreement

For ease of comparison, the main differences between an employment contract and a management agreement are outlined below:

Director as Founder of the Company

When the director is also a founder of the company:

• they are not required to establish an employment relationship;

• they may perform the function without remuneration.

However, in such cases, the company is generally required to calculate and pay mandatory social security contributions based on the statutory minimum base, unless a legal exemption applies.

Exemptions from Paying Contributions for a Director

The company is not required to pay taxes and contributions for a director if:

• the director is employed by another employer;

• the director is a sole proprietor who independently performs business activities and pays their own taxes and contributions.

These situations require careful documentation, as they are frequently reviewed during tax audits.

Foreign Director

The applicable legal regime depends on the manner of engagement:

• Director employed under an employment contract – must obtain a work permit and temporary residence permit;

• Appointed director (without employment) – does not require a work permit but may stay in Serbia for a maximum of 90 days within a 180-day period.

A unified residence and work permit is therefore required either when the director is employed or when they intend to stay in Serbia for more than 90 days. Incorrect structuring of the engagement model may result in misdemeanor liability for the company.

Director’s Powers

A director’s powers derive from:

• the law;

• the articles of association or statute;

• decisions of the company’s competent bodies.

Core powers include:

• concluding contracts on behalf and for the account of the company;

• representing the company before courts and public authorities;

• making decisions regarding employees’ employment relationships.

Although a director may delegate certain powers, such delegation does not relieve the director of responsibility. Toward third parties, responsibility always remains with the director as the company’s legal representative.

Director’s Liability

A director’s liability is extensive and multi-layered. The director may be liable under the law and under contract, and such liability may be internal (disciplinary), misdemeanor-based, or even criminal.

A director is expected to act with the due care of a prudent businessperson, meaning that they must act professionally and in the best interest of the company, while refraining from actions that could cause damage to other participants in business relations or the economy.

1. Statutory Duties under the Law on Companies

The law prescribes special duties of directors, including:

• duty of care;

• duty to disclose personal interest;

• duty to avoid conflicts of interest;

• duty to protect business secrets;

• duty to comply with non-compete obligations.

Breach of these duties may result in the director’s personal liability for damages.

2. Liability for Damages

A director may be liable to the company, its members, and in certain cases its creditors (piercing the corporate veil), if it is proven that the damage resulted from negligent or improper conduct.

3. Tax and Misdemeanor Liability

The director is responsible for all financial reports and tax payments. Liability may arise for:

• failure to pay taxes and contributions;

• failure to submit or incorrect submission of tax returns;

• delays in submitting reports to competent authorities.

Depending on the severity of the breach, liability may be misdemeanor-based or criminal.

4. Liability toward Employees

All decisions related to:

• hiring,

• termination of employment,

• disciplinary proceedings,

• work organization and occupational safety,

are formally made by the director. The director’s signature represents the will of the company, regardless of any internal division of responsibilities.

Conclusion

The position of director is not merely a formal function, but the role bearing the greatest legal risk within a commercial company. For this reason, the legislator insists on clearly defined status, powers and responsibilities, as well as adequate remuneration.

An improperly structured relationship with a director is often the source of tax, labor and corporate disputes. Accordingly, proper engagement of a director is one of the key elements of stable and lawful business operations.

Law Firm Petrović Mojsić & Partners