Can employee become Director of a Private Limited company?
A director is a person from a group of managers who leads or supervises a particular area of a company. The Companies Act, 2013 does not contain an exhaustive definition of the term “director”. Section 2 (34) of the Act prescribed that “director” means a director appointed to the Board of a company. So employee or salaried person can become director in private limited company. If any person working with companies like MNC he may have employment agreement/bond. Such employment agreements strictly prohibit a salaried person to become employee of another company.
Hence an employee can become Director of Private Limited company provided his existing employment agreement allows. One must check his / her employment agreement before becoming director in company.
Example : Mr. A is assistant manager in ABC Private Limited and has employment contract strictly prohibits salaried person to become employee of another company. In such situation Mr. A cannot become Director of Private Limited company.
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Types of Director in Private Limited Company
There are few types of directors in the Company Act 2013 which give clarity about directors’ role and responsibilities. In simple words, there are two main types of directors known as “Executive” and “Non-executive” Director. Executive director is active director who devotes his whole time of working hours to the company. As like any other employee he works for company. Where a non-executive director is a Director who is not a whole-time Director he does not get involved in the day-to-day work.
- Alternate Director
- Nominee Director
- Small shareholders Director
- Additional Director
- Residential Director
- Shadow Director
- Independent Director
Common reasons employee cannot become Director of Private Limited company
Employee is person how is hired by an employer with purpose. Employer want employee to perform certain duties with his skills. And in return he offers salary to employee.
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Employment Contract
At the time of hiring an employee many MNC companies form employer-employee agreement. Such agreement prohibits employees to take duel employment. Such contract have legal binding on employee. Become becoming director in company employees much check employment contract. legal challenges prohibiting him from working in both places at the same time.
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Time Commitment
Employers hire employees with the purpose of a specific task that he may perform for company. In normal course one has to work for appx 8 Hour on working days. If employees want to become director of another company he may not have time to fulfill both companies duties. Time Commitment will be major concern in duel employment.
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Conflict of Interest
Where any employee is working in ERP Software Company and he also becomes director of Private Limited company who works in ERP software. In such a situation conflicts of interest/confidentiality will be a major concern for both companies.
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Steps to become Director of Private Limited company
- Check AOA for an appointment
- Call board meeting & issue board resolution
- Apply for Class 3 Digital Signature
- Apply For DIN
- Prepare directors consent
- File DIR 12
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Conclusion
A salaried person can become Director of Private Limited company provided his existing employment agreement allows. The company director is person who perform duties for company and on behalf of company. The legislation does not forbid it, any person can become director in upto 20 companies. Sometimes a person who want to start his own startup company can become director. However, taking the written consent of the existing employer before becoming director of the company is recommended.
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