Limited liability companies are an attractive form of business entity in the United States. Often thought of as a cross between a corporation and a partnership, an LLC has a distinct legal identity separate from that of its owners. The owners, or members, have full rights to manage and operate the company, but limited liability for any claims and losses. This unique structure presents a risk that the members of the LLC will promote their own interests above that of the company. To counteract this risk, members owe two duties of trust to the LLC, known as fiduciary duties.
Duty of Care
The duty of care is a "good faith" obligation. It requires that the member acts prudently and with reasonable skill and care in carrying out his role within the company. Members typically are not liable for the consequences of business decisions they make in good faith, especially if they rely on the advice of competent professionals such as external accountants and lawyers. This is known as the business judgment rule.
Duty of Loyalty
The duty of loyalty requires the member to set aside his own personal interests -- and those of outsiders -- and to act in the best interest of the LLC. Thus, a member may not use company assets for his personal pursuits, compete with the LLC, accept secret commissions or take LLC business opportunities for himself. Conflicts of interest -- a situation whereby the member owes duties to more than one person or organization and, as a result, cannot do justice to his obligations to the LLC -- also violates the duty of loyalty.
Anyone Who Manages Owes Duties of Trust
Generally, LLCs may be member-managed, which means that all the owners share the management of the company, or manager-managed, which means the LLC is managed by an appointed manager who may also be a member. The basic rule is that anyone who has the power to manage the company owes fiduciary duties to the company and its members. Thus, the members of a manager-managed LLC who do not engage in active management may not owe any fiduciary duties to the LLC, unless the LLC's operating agreement says otherwise.
Violation Hurts the Pocketbook
A member or manager who violates his fiduciary duty may be subject to a civil action. The claimant may receive damages for the financial loss he has suffered. If the loss cannot be calculated in money, the court may impose an injunction to stop the member or manager from continuing the adverse behavior or void any contracts entered into by the LLC that were the result of a member or manager's disloyalty. The legal remedy is determined by a court on a case-by-case basis.
Reducing or Eliminating Fiduciary Duties
LLCs are regulated by state law. Some states impose fiduciary duties on members and managers in full; others allow members and managers to restrict or even eliminate their fiduciary duties to some degree or other. In Washington, for example, the default position is that members do not owe any fiduciary duties to other members, unless their action constitutes gross misconduct, fraud or a deliberate violation of the law. Fiduciary duties represent a complex area of business law. Any member or manager considering varying his fiduciary duties should consult an attorney.
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