Fiduciary Duties For Members and Managers of LLCs
LLC members and managers may have duties and loyality and duties of care to other members and the LLC.
As a member or manager of a limited liability company (LLC), you may owe duties of trust, known as fiduciary duties, to the LLC. With LLCs, it is important to be able to trust and rely upon those in charge of managing the LLC to promote the interest of the LLC above their own or some outside interest. Whether or not someone owes a fiduciary duty to the LLC and its members will depend on whether that person has responsibilities for managing or running the LLC. Some LLCs are member-managed, meaning all the members share in the management of the LLC. Others are manager-managed, meaning the LLC members appoint someone (either an LLC member or nonmember) to run the business. A member's fiduciary duty will depend on whether the LLC is member- or manager-managed and whether the LLC member has any management responsibilities.
There are two key fiduciary duties owed to an LLC; the duty of loyalty and the duty of care. Below you will find issues to consider in determining the nature of your fiduciary duties to an LLC.
Fiduciary Duty of Loyalty
Under the duty of loyalty, a member or manager is supposed to put the success of and benefits to the LLC above any personal or individual advantages. In showing loyalty to the LLC, the person must act honestly in any dealings with the LLC and avoid any conflicts of interest between the LLC’s objectives and their own personal goals. As part of the duty of loyalty, a person may not take secret advantage of any LLC business opportunities, amass secret profits from the LLC’s commercial activities, or compete directly with the LLC. For example, if you learn about a lucrative investment opportunity through your dealings with your LLC, you may not try to usurp that investment for your personal gain. In some instances, you may be allowed to receive a benefit from LLC opportunities as long as you've given prior full disclosure to and received approval from the LLC.
Fiduciary Duty of Care
The duty of care requires that members or owners act in good faith and exercise reasonable care in carrying out their obligations to and directing the activities of the LLC. For example, if your LLC is considering a real estate purchase, you are obligated to act responsibly and in a reasonably prudent manner in assessing and advising the LLC about the potential transaction. Under the business judgment rule, you are typically not liable for business decisions made in good faith and with reasonable care that turn out to adversely impact the LLC.
Altering Fiduciary Duties
Most states spell out fiduciary duties by statute or they are clear through judicial decisions. Some states do not allow members or managers to restrict or eliminate these fiduciary duties. Others do allow members or managers to alter or eliminate their fiduciary duties by separate contract or under the terms of the operating agreement which spells out the authority of members or managers to operate the LLC. You may wish to consult an attorney to determine whether or not your state statutes or case law permits LLC fiduciary duties to be reduced, expanded, or excluded by party agreement.
Fiduciary Duties Owed in Member-Managed LLC
In some cases, LLC members may decide to participate in the management of their LLC. Those LLC members who operate the business owe the fiduciary duties of loyalty and reasonable care to the non-managing LLC owners. Depending upon your state, LLC members may be able to revise, broaden, or eliminate these fiduciary duties by contract or under the conditions of their LLC operating agreement.
Fiduciary Duties Owed in Manager-Managed LLC
LLC owners may decide to delegate their duties to direct their LLC to an outside manager who may be one of the LLC members or a non-owner of the LLC. In this instance, LLC owners who do not manage the LLC normally do not owe the fiduciary duties to each other. However, any external managers that operate the LLC must comply with these fiduciary obligations. If allowed under your state’s statutes or case law, your manager’s fiduciary duties may be modified or removed by contract or under the provisions of the operating agreement.