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LLC Members: What You Need to Know about Your Fiduciary Duties

Posted by Darryl V. Pratt | Nov 15, 2018 | 0 Comments

As a member of an LLC, you may owe a fiduciary duty to the company. The two key fiduciary duties are the duty of loyalty and the duty of care. Whether you have a fiduciary duty will depend on the LLC's management structure and whether you have management responsibilities. Understanding your duties is essential to avoiding liability.

What is a fiduciary duty?

Fiduciary is from the Latin word, fiduciarius, which means confidence and trust. A person or entity (fiduciary) with the power and obligation to act for another person or entity (beneficiary) is required to be trustworthy, to act in good faith, and to be honest. 

What is a fiduciary's duty of loyalty?

Under the duty of loyalty, a fiduciary must put the success of and benefits to the LLC above individual gain. A fiduciary must act honestly in any dealings with the LLC and avoid any conflicts of interest between the LLC's goals and his or her personal goals. In some instances, a member may be allowed to benefit from an LLC opportunity if the member provides prior full disclosure to the LLC and receives the LLC's approval.

Examples of the duty of loyalty that may be imposed on a member:

● To account to the LLC for any LLC property that the member holds.

● To refrain from dealing with the LLC on behalf of an interest adverse to the LLC.

● To refrain from competing with the LLC.

What is a fiduciary's duty of care?

A fiduciary is held to a higher standard of conduct and trust than that required of a casual business person: 

● The duty of care requires that members or managers act in good faith and exercise a certain level of care in fulfilling their obligations to and directing the activities of the LLC. 

● For example, if the LLC is considering a major acquisition, a fiduciary must act responsibly and in a reasonably prudent manner in assessing the terms and in advising the LLC about the potential transaction. 

● Under the business judgment rule, a fiduciary is typically not liable for business decisions made in good faith and with a certain level of care, even if they eventually adversely impact the LLC.

The duty of care imposed on a member may be one of the following standards:

● Ordinary Negligence - to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the LLC.

● Gross Negligence - to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

● Intentional Acts - to refrain from intentional misconduct or a knowing violation of law.

Where, exactly, do these fiduciary duties come from?

The state law governing the LLC's formation may include statutes and case law imposing fiduciary duties on members and managers. Some states allow these duties to be reduced, expanded, or excluded in the operating agreement or by a separate agreement, but other states do not permit modification of fiduciary duties by agreement.

What to do next

When it comes to LLCs, the “rules of the road” can be complex and unique to each situation. We'll complete a comprehensive review of your LLC operating agreement and the governing state law to help you understand any fiduciary duties you may owe to the LLC -- and don't worry; we'll help you navigate those laws and duties.

Call the Business Law attorneys at Pratt Law Group at (972) 712-1515 to schedule a consultation today to learn how we can help.

About the Author

Darryl V. Pratt

With over twenty (20) of experience as a dual-licensed Attorney and Certified Public Accountant, Darryl V. Pratt has practiced law in all areas of corporate and business law, non-profit law, estate planning, probate, guardianship, asset protection planning, bankruptcy (Chapters 7, 13 and 11), real estate, and taxation.

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