Limited liability companies (LLCs) have become one of the most popular forms of business entities in the United States. LLCs combine the advantages of a corporation with the advantages of a partnership. A properly formed LLC can possess both the limited liability of a corporation and the pass-through tax treatment of a partnership. Like partnerships, LLCs are characterized by informality of organization and internal governance by contract. Like corporations, they protect their members from investor-level liability.
The flexible management structure of LLCs allows owners to shape the LLC’s organization and management to meet the needs of the business. An LLC member can be an individual, a corporation, a partnership, another limited liability company, or any other legal entity.
Fiduciary Duties of Managers
An LLC can be structured as manager-managed or member-managed. In a manager-managed LLC, the members appoint a manager or managers to run and manage the LLC business. The managers who have been charged with the responsibility for running the LLC have a duty to the members and other managers to act in good faith and promote the interest of the LLC. In most states, the manager’s fiduciary duties include the duty of loyalty and the duty of care.
Duty of Loyalty
The duty of loyalty includes the obligations to account to the LLC members, to refrain from dealing with the LLC in a manner that is adverse to it, and to refrain from competing with the LLC before its dissolution.
Duty of Care
The duty of care is an obligation to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner reasonably believed to be in the best interests of the LLC. Managers generally won’t be held liable if they reasonably rely in good faith on the opinions and advice of competent professionals and other reliable sources.
Fiduciary Duties of Members
LLC members have fiduciary duties only if their LLC is structured as a member-managed LLC. If the LLC is member-managed, then the members share in management responsibilities of the LLC. In that case, the members (like managers in a manager-managed LLC) have a duty to the other members and the LLC to act in good faith and promote the interests of the LLC. As with managers, this generally includes the fiduciary duty of loyalty and duty of care to the other members and the LLC.
If the LLC is manager-managed, meaning the members have delegated the management responsibility of the LLC to another person or persons, then the members will not owe any fiduciary duties to other members or anyone else. They are merely owners/investors in the LLC with no management duties.
State Laws Govern Fiduciary Duties
The fiduciary duties of LLC members and managers are laid out in a state’s LLC statute and relevant case law. Some states do not allow LLC members or managers to change or eliminate their fiduciary duties. Others allow changes within certain specified parameters.
Recently some states, like California and Delaware, have amended their laws to give LLCs more flexibility in deciding the scope of the fiduciary duties for their LLC managers and members. Under Delaware’s amended law, LLCs can eliminate fiduciary duties altogether as long as they do “not eliminate the implied contractual covenant of good faith and fair dealing.” The intent was to give parties wide latitude to determine by contract the fiduciary duties for their LLC members and managers.
You may want to consult an experienced business law attorney if you are trying to decide whether an LLC is the right structure for your company or to review your operating agreement. An attorney can also help you learn about the LLC fiduciary duties that exist by law in your state and whether or not those duties can be reduced, expanded, or eliminated by agreement.