Quick answer
An Estonian OÜ does not have to sign a contract with its management board member. The relationship starts once the shareholders elect the member and the member accepts, and it is governed by company law and the rules on contracts for services, not by employment law. A written board member agreement is worth having once the company pays a fee or someone other than the sole owner sits on the board, because it sets out the duties, the fee, the notice period and what happens on removal.
Many foreign founders register an Estonian private limited company (osaühing, OÜ), become its only board member and never sign anything with their own company. That is lawful, and in many such companies nothing more is needed. A written agreement becomes useful once you hire a director, bring a co-founder onto the board or start paying yourself a fee, since the law leaves most practical terms for the parties to agree.
This guide explains when a board member agreement, also called a board member contract or a management board member service agreement, is worth signing and what it should contain. Who can sit on the board and when a board member is personally liable are covered in our guide to management board members.
What a Board Member Agreement Is
A board member agreement is a contract between an Estonian OÜ and a member of its management board that sets the terms on which that person runs the company. The Commercial Code mentions it but does not regulate it as a separate type of contract. Estonia’s Supreme Court has repeatedly described the relationship as similar to an authorisation agreement, which is a contract for services under the Law of Obligations Act.
The Employment Contracts Act expressly does not apply to the contracts of a company’s management board members (§ 1(5)). A board member is therefore not an employee, whatever the document is called, and is entitled to paid holiday, notice or redundancy pay only where the agreement provides for them.
Is a Board Member Agreement Mandatory?
No. Electing a board member takes a shareholders’ resolution and the member’s consent, but the law does not require a contract. A contract can be concluded in any form (Law of Obligations Act § 11), so terms approved by the shareholders and accepted by the member bind the parties even without a signed document. A signed agreement simply makes them easier to prove.
Whether you need one depends mostly on who sits on the board and whether they are paid:
| Your situation | Do you need a board member agreement? |
|---|---|
| Sole owner and only board member, no fee | Usually not. The law already sets your duties |
| Sole owner and only board member, paid a fee | A resolution setting the fee is required; a short agreement is advisable |
| Two or more founders on the board | Recommended, to divide duties and settle fees and exit terms early |
| A hired or outside director | Strongly recommended, to agree duties, fee, notice and compensation on removal |
| A board member who also does other work for the company | Recommended, plus a separate employment contract for the other work |
Whenever a fee is paid, its amount and payment procedure must be set by a resolution of the shareholders, or of the supervisory board if the company has one (Commercial Code § 180¹). How the fee is taxed and registered is explained in our article on board member remuneration.
Board Member Agreement vs Employment Contract
The two contracts differ in four main ways:
| Issue | Board member agreement | Employment contract |
|---|---|---|
| Main law | Commercial Code and Law of Obligations Act | Employment Contracts Act |
| Holidays and working time | Only if the agreement provides for them | Guaranteed by law |
| Ending the role | Removal from office at any time, without a reason; the agreement ends on its own terms | The employer needs a lawful ground and, usually, notice |
| Compensation when the role ends | Only if the agreement provides for it | Statutory redundancy pay where it applies |
A board member can still have an employment contract with the same company, but only for work that is not management. The founder of a small café, for example, can run the company under a board member agreement and work as its chef under an employment contract, which the shareholders must also approve. Our article on hidden employment relations explains why the work actually done matters more than the contract’s title.
What to Include in a Board Member Agreement
The agreement can cover anything that does not conflict with the law or the articles of association. These clauses matter most:
| Clause | What to agree |
|---|---|
| Duties and limits | Areas of responsibility, division of work between members, deals that need the shareholders’ approval first and how the member reports to them |
| Fee and expenses | Amount, payment dates, bonuses and expense reimbursement, in reasonable proportion to the duties and the company’s finances |
| Holidays and availability | Paid days off, if any, and how reachable the member must be, since the law sets no working time for board members |
| Term | Fixed or indefinite. Unless the articles of association set a term, a board member is elected indefinitely |
| Notice and compensation | Notice for each side, grounds for termination without notice and any compensation due on removal without fault |
| Non-compete | While in office, the member may not run a competing business or sit on a competitor’s board without the shareholders’ consent. Any restriction after the member leaves must be agreed, with its scope and duration |
| Confidentiality and handover | What counts as a business secret, how long the duty lasts and the return of documents, passwords and access on exit |
| Liability and insurance | The time limit for the company’s claims against the member (five years unless agreed otherwise) and who pays for directors’ and officers’ (D&O) liability insurance |
Two rules in the Commercial Code apply whatever the agreement says. First, if the company’s finances deteriorate significantly and continuing the payments would be extremely unfair to it, the company can seek a lower fee. The member may then terminate the agreement with one month’s notice (§ 180¹).
Second, a limit on liability does not bind creditors. If the company cannot pay its debts, a creditor or trustee in bankruptcy can still claim damages from the member, even if the company has waived its claim or shortened the limitation period (§ 187).
How to Sign the Agreement So It Is Valid
The board member’s usual right to sign for the company does not cover this agreement. The shareholders decide on concluding, amending and terminating it, set its terms and appoint the person who signs for the company (Commercial Code § 168(1)(10)). If the company has a supervisory board, it takes these decisions instead. An agreement without the required approval is void (§ 181(3)).
If you sign an agreement, you need two documents: a shareholders’ resolution that approves it, sets the fee and names the company’s representative, and the agreement itself, signed by that representative and the board member. In a company with one owner, the owner adopts the resolution alone and names in it the person who signs for the company. Both documents can be signed digitally with an Estonian ID card or an e-Residency digital ID card. Neither needs to be filed with the Commercial Register, so keep them with the company’s records.
Removal and Resignation: Notice, Compensation and the Agreement
Shareholders can remove a board member at any time without giving a reason, and a board member can resign at any time (Commercial Code § 184). Either step ends the board membership, but the agreement ends according to its own terms and the Law of Obligations Act rules on authorisation agreements. Under those rules, either side can terminate an indefinite agreement at any time. A board member who leaves before the company can arrange a replacement may, however, have to compensate the company for its loss (§§ 630–631).
This is why notice and compensation deserve clear wording. Removal does not end the agreement by itself, so a removed board member may argue that the fee continues until the agreement is terminated. When a member leaves on good terms, a short termination agreement approved by the shareholders can settle the last fee, the handover and any non-compete. The register filings are covered in our guides to changing a board member and resigning from the board.
Drafting or Reviewing Your Agreement With Eesti Firma
Our legal team drafts board member agreements together with the shareholders’ resolution that approves them. We tailor the terms to your board and how its members are paid, and can also review an agreement you already have. Our accountants can then register a paid board member and handle the payroll and tax reporting for the fee.
Frequently Asked Questions
Yes. Both names describe the same contract between an OÜ and a member of its management board. Estonian law firms and Startup Estonia often call it a management board member service agreement, and whatever the name, it is not an employment contract.
Yes, as a starting point. Startup Estonia, a government initiative, publishes a free model management board member service agreement, but any template has to be adapted to the duties, fee and exit terms. It still needs a shareholders’ resolution that approves it.
No. A board member agreement can be signed on paper or digitally and is not filed with the Commercial Register. It does need the shareholders’ approval, because an agreement without it is void.
Yes. Estonian law does not require a contract between a company and its board member to be in Estonian, so an English agreement is valid. Use a language that every signatory understands.
