Fiduciary Duties of LLC Members
There are more than 4 million small businesses in California, many of which exist as LLCs. As an LLC member in San Francisco, California, or the San Francisco Bay Area, you have certain fiduciary duties to uphold. Breaching these duties could result in legal action against you as an individual, making it important to understand the scope of your obligations.
Therefore, it is essential to understand the fiduciary duties of LLC members and what they entail. The skilled business law attorneys at the Law Offices of David H. Schwartz, INC are more than prepared to help you understand these expectations in depth. Reach out today, and they can help you understand your role—and the roles of those working with you.
What Is a Fiduciary Duty?
Fiduciary duty is a legal obligation that requires someone to act in the best interests of their clients, beneficiaries, or investors. This means that they must always prioritize their clients’ interests above their own financial gain, and they must not engage in any activity that conflicts with those interests. This legal duty is common in many professions, including lawyers, financial advisors, and board members.
Fiduciary duty establishes trust between the client and the fiduciary. By acting in the client’s best interests, the fiduciary is demonstrating that they are trustworthy and reliable. And as we all know, trust is a critical component of any business relationship.
Without trust, clients are less likely to do business with you, and you could even face legal consequences for breaching your fiduciary duty.
When it comes to business, fiduciary duty is particularly crucial for LLCs. LLCs are required to follow fiduciary duty when managing the company’s affairs, assets, and liabilities. Failure to act in the company’s best interests could result in legal action against the members of the LLC. Therefore, it’s essential for LLC members to understand their fiduciary duties and obligations.
Another thing to keep in mind is that fiduciary duty is not just an ethical obligation—it’s also a legal one. If a fiduciary fails to act in a client’s best interests and causes harm, they could be held liable for any resulting damages. In other words, fiduciary duty is not just a “nice to have” principle. It’s a legal obligation that can have real-world consequences.
Member-Managed LLCs vs. Manager-Managed LLCs
In a member-managed LLC, all the members have a say in deciding the company's strategy and handling the LLC's operations. Therefore, all the members collectively owe a fiduciary duty to each other.
In a manager-managed LLC, one member is appointed as the manager, responsible for handling the company's operations. Usually, the manager owes a fiduciary duty to all other members.
When members manage the LLC, they take an active role in the company's supervision, decision-making, and direction. As a result, the fiduciary duty of these members is high. A member must not divert opportunities presented to the LLC, breach confidentiality agreements established between members, or behave fraudulently.
In a manager-managed LLC, the manager (who owes a fiduciary duty to the company) has a higher degree of flexibility, thus, a higher duty. A manager responsible for autonomy and decision-making is crucial to the daily operations of the company. The manager must seek the best interests of the company, communicate their decisions clearly with the other members, and disclose any conflicts of interest.
Fiduciary Duty of Loyalty
Fiduciary duty requires a duty of loyalty. This means that when you enter into a business relationship, you have a legal obligation to act in the best interest of the other party, not yourself. This includes disclosing any potential conflicts of interest and avoiding any actions that might benefit you at the expense of your partner.
For example, if you’re a CEO of a company, you have a duty of loyalty to your shareholders. You’d be breaking that duty if you were to act in your own financial interest, rather than in the interest of the company.
As previously mentioned, fiduciary duty requires that you avoid conflicts of interest. But what happens when you can’t avoid them entirely? In those cases, you need to be transparent and disclose all potential conflicts of interest.
For example, if you’re a board member of a company that’s considering a merger with another company in which you have a financial interest, you need to disclose that conflict of interest to the rest of the board. Failure to do so could result in serious legal consequences.
Another aspect of fiduciary duty is non-competition. This involves not using any proprietary information or trade secrets gained from a business relationship to start or work for a competing business.
For example, if you’re an employee of a company and you leave that company, you can’t take their customer lists and start your own competing business. Doing so would be a breach of your fiduciary duty to the company.
Fiduciary Duty of Care
Fiduciary duty requires a duty of care. This means you must act with the level of care and diligence that a reasonable person in your position would use.
For example, if you’re an accountant for a business, you have a duty to make sure that the financial statements you prepare are accurate and complete. Failing to do so could result in serious financial consequences for the business and could also breach your fiduciary duty.
Can I Waive My Fiduciary Duties?
While many LLC operating agreements include an indemnification clause that shields members from liability resulting from their good faith acts, such clauses do not legally absolve members of their fiduciary duties.
Therefore, in most cases, waiving the fiduciary duties is a breach of the contract and may result in severe consequences.
Are There Consequences if Members Don’t Follow Their Fiduciary Duties?
LLC members who fail to carry out their fiduciary duties are held accountable by law, and the consequences for such a breach may range from monetary fines to legal liabilities. Such consequences may include:
Lawsuits are filed against the members by the company or other members to recover their losses.
Removal of the member from the board or the company altogether.
Monetary fines and legal charges, depending on the severity of the breach.
Skilled Legal Advocacy
If you are facing fiduciary duty issues as an LLC member or are unclear about your roles and responsibilities, it's a good idea to seek the help of a business litigation attorney.
At the Law Offices of David H. Schwartz, INC, skilled attorneys can help you navigate through the complexities of fiduciary duties and represent your interests efficiently in any legal matter. They serve those in San Francisco and the Bay Area, and the neighboring areas—such as San Jose, Santa Clara, San Mateo, Oakland, and Alameda County. For professional legal support, give the firm a call today.