An owner performs the functions of company’s director. Is it legal? How to legalize these relations – labor or corporative? Should the salary be paid to the owner-director?
Owner has the right to be director
Let us remind, that according to p.2 art. 65 of the Commercial Code of Ukraine (hereinafter – ComCU) the owner can exercise his right to run a company directly or through authorized body under charter or other constituent documents.
So, the ComCU grants the owner the right to manage the company in case the charter or other constituent documents so provide. This statement is confirmed by a bunch of court rulings.
Labor or corporative relations: court rulings
Indeed, ruling of Constitutional Court of Ukraine No.1 – рп/2010 of January 12, 2010 on official interpretation of p. 3 art.99 of the Civil Code of Ukraine (hereinafter – CivCU) states that the capacity of authorized body to suspend a member of the executive body from duty contains on art.99 of the CivCU, not the Labor Code, i.e. it is not a subject of labor regulations.
So, the relations resulting from the performing by the owner of the director’s functions without conclusion of labor agreement are corporative. But it should be understood that in legal terms the owner does not act in director’s capacity but performs some managerial functions entrusted with him/her.
Ruling of Sumy Administrative Circuit Court on case No. 2a-1870/1072/12 of March 26, 2012 determines the performance of director’s functions by the owner does not constitute the labor relations. Kharkiv Administrative Circuit Court in its decision on case No. 820/3159/18 of June 7, 2018 confirmed that the relations which occurred due to the performance of director’s functions by the owner without conclusion of labor agreement (contract) are corporative and there is no obligation to conclude labor agreement or pay salary.
Recently the Eighth Administrative Court of in its ruling on case No. 857/1476/19 of March 14, 2019 and Chernihiv Administrative Circuit Court in its decision on case No. 824/189/19-а of May 23, 2019 came to a conclusion that the relations that had place during the performance by the owner of the director’s functions without conclusion of labor agreement are corporative, so there is no obligation to conclude labor agreement, accrue and pay salary.
This means that if the labor agreement is not concluded then no need to accrue and pay salary to the owner. As according to the legislation, the labor relations provide for remunerations to be payed to the employee, in case the owner acts in director’s capacity, he/she does not draw a salary.
Controlling authority stance
The controlling authorities also presume that the owner can perform managerial functions without conclusion of labor agreement. For instance, the Ministry of Social Policy in letter no. 113/13/84-12 of February 7, 2012 stated that the form of owner’s (stakeholders) participation in company’s management in case the owner performs the functional duties without conclusion of labor agreement and the form of remuneration for such activity can be specified in the constituent documents.
The State Fiscal Service of Ukraine in its individual tax advice No. 435/6/99-99-15-02-02-15/ІПК of June 1, 2017 also admits the possibility to assign contract signatory for reports submission (information about this person will be entered into the Unified State Register) without appointment of director provided that the business activity is not conducted the company does not employ people.
The controllers name two conditions:
- absence of business activity;
- absence of employees.
The legislation does not provide for such limitations. The owner of the company has the right to manage the company at any time if charter or other constituent documents so provide.
So, if the general meeting (or owner) made a decision to temporarily operate without the director (including cases when the company does not conduct the business or temporarily suspended it), then:
- the company’s charter must provide the provisions according to which the owner can manage the company and also management procedure followed by owner (without formation of labor relations). If the charter does not contain such provisions, then it should be amended upon the decision made by the general meeting and documented in the minutes;
- the general meeting of owners or owner must make a decision on management of the company by the owner under the charter and document this decision in the minutes.
The minutes and the charter must specify that:
- the owner can act on behalf of the company with full authority;
- the labor agreement wasn’t concluded with the director;
- the director does not receive the reimbursement for performance of the duties;
- the information on owner who perform director’s functions must be entered into the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Organizations;
- the tax authority, where the company is registered, must be notified. For this purpose, 1-ОПП application (annex5 to the Procedure approved by order of the Ministry of Finance No. 1588 of December 9, 2011) marked “Changes”;
- the agreement on recognition of e-documents and card with specimen signatures of all authorized persons must concluded with the bank again, if necessary.
In such case there is no need to issue an order on designation of the owner as director, make record in the employment record book, notify the local tax bodies when the owner takes up the director position.
So, is the owner is not in the labor relations with the company, then he does not receive the salary and pay a single social contribution, personal income tax and military levy.
At the same time, the owner has the right to maintain accounting records, sigh financial, tax and other reporting (p.3-4 art.8 of Law “On accounting and financial reporting in Ukraine” No. 996-XIV of July 16, 1999) and the owner can sigh tax declaration. (sub-i. 48.5.1 of the Tax Code of Ukraine).
