Sole founder as director: is an employment contract and salary required

How a director is appointed under the LLC law

The sole executive body (director) is elected by the general meeting of participants for the term set in the charter and may be elected from non-participants; only a person with full legal capacity can be director (ZRU-1137, Art. 42). The contract between the company and the director is signed on behalf of the company by the person who chaired the meeting that elected the director, or by a participant authorised by the meeting.

In a single-participant company, decisions on matters within the competence of the general meeting are taken by the sole participant alone and recorded in writing (Art. 38). So appointing oneself as director is formalised by a decision of the sole participant — a mandatory document under either model.

• The director acts for the company without a power of attorney, issues powers of attorney, and concludes and terminates employment contracts with staff (Art. 42).
• The director's activity is governed by the company's documents and the contract between the company and the person acting as director.

What the Labour Code says

Individual employment relations are relations based on an agreement between employee and employer on personal performance of a job function for pay, subject to internal labour regulations (Art. 11). When a sole participant runs their own company, the employee and the person who forms the employer's will coincide — which is why the Code takes such a head out of the special rules on heads (Art. 485): the fixed-term contract, probation of up to six months, material liability and special grounds for termination.

This does not mean an employment contract is prohibited. Practice allows both models; what matters is that the chosen one is documented consistently.

Model 1: employment contract and salary

The director is hired as an employee: decision of the sole participant, employment contract (signed for the company by the participant), order on taking office, entry in the Unified National Labour System. Salary is accrued monthly.

• Monthly pay for a fully worked norm may not be below the statutory minimum wage (Art. 245 of the Labour Code).
• PIT is withheld from salary at 12% (Art. 381 of the Tax Code).
• Payroll costs are subject to social tax (Art. 403), at the general rate of 12% (Art. 405).
• Pros: length of service, clear payroll costs, leave and sick pay under general rules. Cons: monthly PIT and social tax, timesheet and HR paperwork.

Model 2: no employment contract

The participant performs the director's functions under the sole participant's decision and the charter, without an employment contract or salary. Income is received as a participant — as dividends from net profit.

• Dividends and interest are taxed at 5% (Art. 381 of the Tax Code); no social tax applies because they are not payroll costs (Art. 403).
• The director does not accrue length of service through an employer — if needed, it is built by other means provided by law.
• Labour guarantees (leave, benefits) do not apply to such a director.
• Document the sole participant's decision assigning the director's functions and, ideally, the contract under Art. 42 of ZRU-1137 without a pay clause.

What to consider when choosing

The main risk of the second model is inconsistency. If the director in fact receives regular living payments disguised as cash advances, loans or financial aid, the tax authority may recharacterise them as employment income: it covers any payments for work actually performed (Art. 371), and the social tax base is determined under the same article (Art. 404).

Once the company has employees, the director as employer must fully comply with the Labour Code towards them — whether or not the director is formally employed.

• regular monthly income needed — salary is more convenient;
• large, irregular profit — dividends at 5% are more efficient;
• length of service matters — an employment contract is needed;
• the company is loss-making — there is nothing to pay dividends from, while salary remains possible.

Documents for each model

Whichever model is chosen, the documents must match it: mixing models is the main source of claims in tax audits.

• Both models: sole participant's decision appointing the director, charter, director details in the register of legal entities.
• Model 1: employment contract, hiring order, staffing table and timesheet, monthly payroll statements, PIT and social tax reporting.
• Model 2: decision to pay dividends from net profit based on the financial statements, 5% tax withheld on payment, no periodic payments without a basis.