Wednesday, April 16, 2008

Fiduciary Duties of LLC Members

At common law, partners owe each other a fiduciary duty of loyalty and good faith. "A fiduciary has a duty to act primarily for the client's benefit in matters connected with the undertaking and not for the fiduciary's own personal interest." Link. "Loyalty" can be a nebulous concept to pin down but, with certainty, one can say that a partner is forbidden from competing against the partnership through an outside business venture and from converting partnership business opportunities to the partner's individual benefit. But limited liability companies are hybrids, not exactly partnerships nor corporations. What fiduciary duties, if any, do LLC members owe to each other? Can these be modified in a written operating agreement.

This variance from state to state on the topic but my general sense of the law prevailing in most states is that managers (be they members or not) owe a fiduciary duty of loyalty to the LLC; however, non-managing members owe no such duty. Further, the fiduciary duty of managers to the LLC can be altered by the operating agreement. The following is an overview of selected state LLC statutes on this subjective to present a better feel for how this shakes out.

California. Section 17153 of the California Corporations Code provides: "The fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partnership." Link. See Section 16404(b) of the California Corporations Code for the specifics of fiduciary duties of partners under California law. "The fiduciary duties of a manager to the limited liability company and to the members of the limited liability company may only be modified in a written operating agreement with the informed consent of the members." Link.

Florida. "[E]ach manager and managing member shall owe a duty of loyalty and a duty of care to the limited liability company and all of the members of the limited liability company." Florida Stat. Section 608.4225(1). Section 608.4225 goes on in great detail relative to the specifics of the "duty of loyalty and duty of care". Under Section 608.423(2)(b), the LLC operating agreement may not "Eliminate the duty of loyalty under s. 608.4225, but the agreement may" change a few other elements of other duties owed by managers to the LLC.

Texas. " Texas law governing LLCs does not specifically address whether manager or member fiduciary duties exist or expressly define them. Therefore the existence of such a duty may be a question of fact dependent upon the unique circumstances of each case and determined by case law. The relationships of managers and members to a limited liability company are generally assumed to be fiduciary in nature." Web site of Tipton Jones, a Texas law firm. Although the Texas LLC Act punts on the issue of defining fiduciary duties for managers, it clearly states that any such duty can be modified by the LLC operating agreement: "The company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company." Texas Business Organizations Code, Section 101.401.


Anonymous said...

Why doesn't a non-managing member owe fiduciary duties?

jjray said...

If the LLC has managers, the concept is that the non-managing members become more like shareholders rather than officers of a corporation. Mere ownership of stock in a company generally does not give rise to fiduciary duties.

Augusto said...

How can you dissociate from an LLC when your 50% partner has broken his promise to execute an operating agreement, is making unilateral decisions and stealing from the company?

Jay McDaniel said...

A number of jurisdictions have had the the issue of operating agreements that disclaim any fiduciary duties among the owners