Director’s Contract: What It Should Include And Why You Need One

If you run a limited company, it’s easy to assume your directors are “covered” just because they’re on Companies House and you’ve agreed things verbally.

But when you’re moving fast (raising investment, hiring, signing contracts, expanding), those informal arrangements can start to wobble.

A well-drafted director’s contract is one of the simplest ways to protect your business from day one. It sets expectations, clarifies authority, and helps prevent expensive disputes about pay, duties, and decision-making later on.

In this guide, we’ll walk through what a director’s contract usually includes, how it differs from other documents (like your Articles), and when your business should put one in place.

What Is A Directors Contract (And When Do You Need One)?

A directors contract (often called a Director’s Service Agreement) is the written agreement between your company and an individual director. It typically sets out:

• what the director is responsible for;
• how they’re paid and what benefits they receive;
• what authority they have to make decisions or sign documents; and
• how you can end the relationship if things change.

It’s particularly important if the director is also working day-to-day in the business (for example, a managing director or founder who is “on salary”). In many small businesses, directors wear multiple hats - and that’s exactly where misunderstandings tend to creep in.

Common Situations Where A Directors Contract Matters

You should seriously consider putting a director’s contract in place if any of the following apply:

• You’ve got more than one director (especially if you’re not family).
• A director is paid (salary, bonuses, commission, or benefits).
• A director has day-to-day operational responsibilities (not just oversight).
• You’re bringing in a new director as the business grows.
• You’re raising investment and need cleaner governance and sign-off processes.
• You want clearer IP and confidentiality protections for founders.

Even if you’re a single-director company, a contract can still be useful - for example, where you want a clear paper trail for banks, investors, or future buyers, or where you need to formalise how you get paid.

In practice, a directors contract often sits alongside documents like your Articles of Association and your Shareholders Agreement. Each does a different job, and having the right mix is what keeps your company stable as it scales.

Directors Contract Vs Articles Of Association Vs Shareholders Agreement

One reason director arrangements get messy is that businesses rely on the wrong document for the wrong issue.

Here’s a simple way to think about it:

• Articles of Association: the company’s internal rulebook (company governance basics).
• Shareholders Agreement: the deal between shareholders (ownership, exits, reserved matters, share transfers, deadlocks).
• Directors contract: the working relationship between the company and the director (duties, pay, termination, confidentiality).

Why Your Directors Contract Should Not “Rely” On The Articles

Your Articles are essential, but they’re not designed to cover the practical, day-to-day working relationship. For example, Articles usually won’t properly deal with:

• performance expectations and KPIs;
• confidentiality and IP in a practical “employment-style” way;
• notice periods and garden leave;
• what happens to company property (laptops, devices, access) when someone steps down.

That’s why many businesses use a dedicated Directors Service Agreement to clearly capture these details.

Where A Shareholders Agreement Fits In

If your director is also a shareholder (very common for founders), your directors contract and shareholders agreement should work together - not contradict each other.

For example:

• If the director is also an employee-like worker, the directors contract might cover their termination, but the shareholders agreement should cover what happens to their shares (e.g. transfer rules, leaver provisions).
• If there are certain “big decisions” requiring shareholder consent, the shareholders agreement should clearly list them (often called “reserved matters”).

Getting alignment between these documents is one of the biggest ways to avoid disputes later, particularly when a co-founder leaves or your business brings in outside investment.

What Should A Directors Contract Include?

There’s no single “one size fits all” directors contract - and that’s important. A director’s role in a startup can look very different from a director’s role in a family trading company or a professional services firm.

That said, most UK directors contracts will cover the following key areas.

1) Appointment, Role And Duties

This section should clearly set out what the director is expected to do. It will often include:

• their position title (e.g. Managing Director, Operations Director);
• high-level responsibilities;
• reporting lines (if relevant);
• how time is allocated (full-time, part-time, flexible); and
• an obligation to comply with company policies and procedures.

It’s also common to reference the director’s statutory duties under the Companies Act 2006 in plain language - for example, acting in the company’s best interests, avoiding conflicts of interest, and exercising reasonable care, skill, and diligence.

From a small business perspective, this is about clarity. If you ever need to address performance concerns or a breakdown in the relationship, you want a contract that clearly defines what “the job” actually is.

2) Authority, Decision-Making And Signing Powers

Many director disputes aren’t about bad behaviour - they’re about assumptions.

For example:

• Can this director sign supplier contracts alone?
• Can they hire staff without approval?
• Can they approve marketing spend above a certain limit?

Your directors contract can set boundaries around authority, including when board approval is required and when shareholder approval is required.

It’s also worth remembering that a director’s ability to “bind” the company depends on the circumstances. Internal limits (like approval thresholds) can still be breached, and in some situations the company may be bound to a third party who is dealing in good faith. That’s why it helps to be clear on written notices and how contracts are formed in the real world - because business commitments can sometimes be created through communications, even where the director didn’t intend to create a formal contract.

Where relevant, you may also want the contract to link back to your internal processes for executing documents properly, particularly where deeds are involved (for example, property transactions or certain guarantees). A helpful reference point is executing contracts correctly, because getting signing formalities wrong can cause major headaches later.

3) Pay, Bonuses And Benefits (And How They’re Approved)

Director pay can be sensitive - especially when some directors are also shareholders, and others aren’t.

Your directors contract should clearly set out:

• salary (if any) and when it’s paid;
• bonus structure and whether it’s discretionary;
• benefits (car allowance, health cover, expense reimbursement);
• pension arrangements (if applicable); and
• whether pay is reviewed annually (and who approves changes).

From a governance perspective, it’s important to be clear about how remuneration decisions are made and recorded - especially if you have multiple directors or external shareholders. If you need a deeper dive into the governance side, directors remuneration rules are a useful checkpoint.

If your director is also a shareholder, you’ll also want your accountant and lawyer aligned on how the director is paid (for example, salary, dividends, or bonuses) so you’re not accidentally creating tax or compliance issues. (This is general information only and isn’t tax advice.)

4) Confidentiality, Intellectual Property And Company Property

Directors usually have access to your most sensitive information - pricing, strategy, customers, systems, and financials.

Your directors contract should deal with:

• confidentiality obligations during and after the appointment;
• intellectual property (IP) created by the director (so the business owns what it pays for);
• return of company property (devices, documents, keys, access cards); and
• IT and data use expectations (particularly if using personal devices for work).

This is also where many businesses quietly reduce risk: if the relationship ends, you want a clear, enforceable obligation to hand back materials and not misuse business information.

5) Conflicts Of Interest And Outside Work

It’s common for directors (particularly non-executive or part-time directors) to have other roles or investments.

Your contract should make it clear:

• what needs to be disclosed (e.g. competing business interests);
• whether outside work requires approval;
• how conflicts are managed; and
• what happens if a conflict can’t be resolved.

This matters because directors have legal duties to the company, and unmanaged conflicts can quickly turn into disputes - especially when there’s a question about whether the director acted in the company’s best interests.

6) Term, Notice Periods And Termination

This is the part many founders prefer not to think about - but it’s also one of the most valuable parts of a directors contract.

A well-drafted termination section often covers:

• when the appointment starts and whether it’s fixed-term or ongoing;
• notice periods (and whether pay in lieu of notice applies);
• garden leave (keeping the director away from the business while still employed);
• termination for serious misconduct; and
• obligations on exit (returning property, confidentiality, handover).

Importantly, ending someone’s appointment as a director (their office) is not always the same as ending their service relationship or any separate employment relationship. Those can follow different legal processes and have different consequences, so your contract should reflect how your business actually operates and what steps you’ll follow.

7) Restrictive Covenants (Non-Compete / Non-Solicitation)

Sometimes, your business needs protection after a director leaves - particularly if they’re senior, client-facing, or have deep knowledge of your commercial strategy.

Restrictions might include:

• non-solicitation of clients/customers;
• non-poaching of staff and contractors;
• non-dealing provisions; and in some cases
• non-compete restrictions.

These clauses need to be drafted carefully. If they’re too broad, they can become difficult to enforce. The goal isn’t to “punish” someone for leaving - it’s to protect legitimate business interests in a way that’s reasonable and proportionate.

How Do You Make A Directors Contract Legally Effective?

Even the best-written contract won’t help much if it isn’t set up properly.

Here are the key practical steps most small businesses should consider.

Make Sure The Company Has Proper Authority To Enter The Contract

Usually, the contract will be approved by the board (and sometimes shareholders, depending on what you’ve agreed in your constitutional documents).

If your business is owner-managed, it can feel odd to “approve” your own contract - but governance still matters. Clean approval records can help later if you sell the business, bring in investors, or face a dispute.

Use Proper Signing Formalities

Directors contracts are usually simple contracts, but sometimes they’re executed as deeds (or accompanied by deeds, depending on what’s being agreed).

As a practical checkpoint, it helps to understand legal signature requirements, especially if you’re signing remotely or using e-signing tools.

If you’re using witnesses (for example, where a deed is involved), make sure you understand who can witness a signature so you don’t accidentally invalidate a document when it matters most.

Align The Directors Contract With Your Other Key Documents

This is where businesses often get caught out.

Your directors contract should not contradict:

• your Articles of Association;
• your shareholders agreement;
• any employment contracts (if the director also has a separate employment role); or
• company policies (like confidentiality, IT, and data protection policies).

Consistency is what makes your legal foundations strong - and it reduces the chance of grey areas that create leverage in disputes.

What Are The Risks Of Not Having A Directors Contract?

When things are going well, it’s tempting to treat director arrangements as “trusted handshake” territory.

But here are some very real risks small businesses face without a directors contract:

• Pay disputes (salary, bonuses, expenses, backpay, or “what was agreed”).
• Unclear responsibilities, making performance management or accountability difficult.
• Signing and authority problems, where a director commits the company to a deal you didn’t want (or where it’s unclear whether the company is bound).
• Confidentiality and IP gaps, particularly if a founder leaves and starts something similar.
• Messy exits, where there’s no clear notice period, handover obligations, or post-exit restrictions.
• Due diligence delays if you’re selling the business or raising funds and you can’t produce key governance documents.

None of these issues are theoretical. They’re common “growing pains” - and they’re much easier to prevent with a properly drafted directors contract than to untangle later.

Key Takeaways

• A directors contract (Director’s Service Agreement) sets clear expectations between your company and a director, covering duties, pay, authority, confidentiality, and how the relationship ends.
• Your directors contract should work alongside your Articles of Association and (where relevant) a Shareholders Agreement - they’re different documents solving different problems.
• Most directors contracts should cover role and duties, decision-making authority, remuneration, confidentiality and IP, conflicts of interest, termination, and post-exit restrictions.
• Signing and approval processes matter - your contract needs to be executed properly and aligned with your company’s governance documents to be effective.
• Not having a directors contract can expose your business to disputes, unclear authority, confidentiality risks, and painful exits that disrupt operations and growth.

If you’d like help putting a directors contract in place (or reviewing an existing one), you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.