Fiduciary Duties in Partnerships

Depending upon the type of partnership and the nature of your role in that partnership, you may have fiduciary duties to the partnership and other partners.

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In partnerships, you may have duties of trust, known as fiduciary duties, depending upon the type of partnership and the nature of your role in that partnership. Your fiduciary duties will differ depending upon whether you are participating in a general partnership or limited partnership and if you are a general partner or limited partner in that business entity. State statutory law, judicial precedent, and the terms of your partnership agreement will further determine what fiduciary duties, if any, you owe to others in your general or limited partnership. Possessing fiduciary duties may spell greater legal liability for a partner who fails to live up to these obligations of trust.

Here are some key issues to consider in determining fiduciary duties owed to a partnership.

Who Owes a Fiduciary Duty?

In operating either a general or limited partnership, partners must be able to trust and rely upon those partners managing the partnership to promote the best interests and success of the partnership. Thus, having a management role is key to the finding of owing a fiduciary duty in a partnership. Typically, the general partners in a general partnership or limited partnership participate in the daily operation and supervision of the business. Because of their role in managing the partnership, general partners are usually viewed as having fiduciary duties in both a general partnership and limited partnership.

In limited partnerships, limited partners usually provide capital resources and are not involved in managing the business, leaving operational duties to the general partners instead. Non-managing limited partners typically do not owe fiduciary duties to the limited partnership. However, limited partners who participate in directing or operating a limited partnership could end up treated as general partners by a court with the associated fiduciary duties.

Fiduciary Duty of Good Faith and Fair Dealing

Under this duty, partners must act with honesty and show good faith and fairness to each other in their partnership interactions. This continuing duty arises starting with the formation of the partnership. It continues through the partnership's ongoing daily operations and ultimately through the partnership's sale or dissolution. This obligation underlies the performance of all the other fiduciary duties in a partnership.

Fiduciary Duty of Loyalty

The duty of loyalty requires relevant partners to place the success and interests of their partnership above their own personal or other business interests. Impacted partners should avoid any conflicts of interest between their partnership duties and their other personal and business activities. As part of the duty of loyalty, one must properly hold partnership property in trust for the benefit of the partners and not use it for one’s own personal advantage. For example, a general partnership may own an office building, but a general partner should not dispose of that partnership asset for his or her individual economic gain to the detriment of the partnership. In some instances, you may be allowed to obtain an individual benefit from partnership assets after full disclosure to and prior approval from the other partners.

Fiduciary Duty of Care

Under the duty of care, partners are expected to act in a reasonably prudent manner in managing and directing the partnership. For example, a general partnership is expected to keep complete and accurate business records for the business. Therefore, a reasonably prudent businessperson would implement appropriate audit controls and procedures to ensure proper accounting and preservation of partnership funds and assets. Under the business judgment rule, a partner is normally not held liable for business decisions made in good faith and with reasonable care that turn out to be erroneous.

Fiduciary Duty of Disclosure

Partners involved in managing partnership affairs are expected to comply with a duty of disclosure or candor. In order to make informed decisions, participating partners should make full disclosures about reasonably known risks and potential benefits of a particular action. These disclosures relate to all partnership activities, including partnership assets, operations, finances, debt, and contracts. Candor is particularly important in instances involving the sale of the business or potential conflicts of interests in business dealings. As part of their duty of disclosure, relevant partners should disclose any conflict of interest they may have relative to any partnership dealings or decisions.

Altering Fiduciary Duties

Fiduciary duties are spelled out in your state’s statutory law or through judicial determinations. Depending upon your state, partners may limit, expand, or eliminate fiduciary duties by agreement, provided that these changes are reasonable under the circumstances. Under state law, certain fiduciary duties can not be eliminated by agreement. It may be helpful to contact an attorney to determine your relevant fiduciary duties in your state and to see if you may alter or do away with certain fiduciary obligations in your partnership agreement.

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