Fiduciary Duties of LLC Members

If you are a member of a Limited Liability Company (LLC), you may have special responsibilities to the company and the other members. These responsibilities are called fiduciary duties. They generally require members or managers to act honestly, exercise appropriate care, and consider the interests of the LLC when making decisions.

Not every LLC member has the same duties. The rules depend on the LLC’s management structure, its operating agreement, and the laws of the state where the LLC is organised. Because state laws differ, you should review your operating agreement and applicable state law before assuming a particular fiduciary duty applies.

What Is a Fiduciary Duty?

A fiduciary duty arises when someone has responsibilities to act for the benefit of another person or entity. In the LLC context, certain members and managers may owe fiduciary duties to the company and, depending on applicable law, to other members.

These duties can affect how you handle company property, business opportunities, conflicts of interest, and important business decisions. Your operating agreement may also define or modify certain duties, depending on the law that governs your LLC.

The Main Fiduciary Duties of LLC Members

Although the details vary by state, LLC fiduciary duties commonly involve loyalty, care, and good faith and fair dealing.

The exact duties that apply can depend on state law, the LLC’s management structure, and the terms of its operating agreement.

Duty of Loyalty

The duty of loyalty generally requires an LLC member or manager to put the company’s interests ahead of personal interests when the law imposes that duty. Depending on the jurisdiction and the circumstances, a member may need to avoid:

• Taking LLC property or business opportunities for personal benefit.
• Entering into transactions that conflict with the company’s interests without the required disclosure, consent, or approval.
• Competing directly with the LLC when applicable law or the operating agreement prohibits the conduct.

State law may allow an operating agreement to modify some aspects of the duty of loyalty. The requirements for doing so vary by state.

Duty of Care

The duty of care generally concerns how members or managers make decisions for the company. When the duty applies, you should make informed decisions and act with appropriate care under the circumstances.

Members and managers should:

• Make careful and informed choices.
• Consider relevant information before making important business decisions.
• Avoid reckless or intentionally unlawful behaviour.

Courts may apply the business judgment rule to protect certain business decisions when a person acts in good faith and within the authority granted to them. The scope and application of the rule can vary by state and by the circumstances of the dispute.

Duty of Good Faith and Fair Dealing

Many jurisdictions recognise an obligation of good faith and fair dealing in connection with LLC agreements. It generally requires parties to act honestly and consistently with the contractual rights and obligations that apply to them.

The exact scope of this obligation varies by state. An operating agreement may also affect how the obligation operates, subject to applicable law.

How State Laws Differ

One of the most important things to understand about LLC fiduciary duties is that there is no single rule that applies to every LLC in the United States. Each state has its own LLC statutes and case law.

For example, the rules in Oklahoma, Texas, Delaware, and Florida differ in important ways. Your operating agreement can also affect the duties that apply to your particular LLC.

• Oklahoma: Oklahoma law governs Oklahoma LLCs, and the operating agreement plays an important role in defining the rights and duties of members and managers. Review the agreement and applicable Oklahoma law before determining whether a particular duty can be modified.
• Texas: Texas Business Organizations Code §101.401 provides that an LLC’s company agreement may expand, restrict, or eliminate fiduciary duties and related liabilities. The provision therefore gives Texas LLCs significant contractual flexibility. Texas Business Organizations Code §101.401
• Delaware: Delaware’s LLC Act places strong emphasis on freedom of contract. Section 18-1101 provides that an LLC agreement may expand, restrict, or eliminate fiduciary duties, subject to the statutory limits, including the implied contractual covenant of good faith and fair dealing. Delaware Code §18-1101
• Florida: Florida law provides specific rules governing fiduciary duties and the extent to which an operating agreement can modify them. For example, Florida law places limits on eliminating the duty of loyalty, altering the duty of care, and eliminating the obligation of good faith and fair dealing. Florida Statutes §605.0105

These examples show why LLC members should not rely on general information about another state’s law when making decisions about their own company.

Can an Operating Agreement Change Fiduciary Duties?

In many states, an operating agreement can modify some fiduciary duties. However, the extent of that flexibility varies considerably.

For example, Texas law expressly permits an LLC company agreement to expand, restrict, or eliminate fiduciary duties. Delaware law also gives substantial effect to the LLC agreement. Florida law, by contrast, places specific statutory limits on how fiduciary duties may be altered. Florida’s LLC operating agreement statute

For that reason, members should review the governing documents before assuming that a fiduciary duty exists, does not exist, or can be waived.

Protection from Liability

The business judgment rule may protect certain business decisions when a member or manager acts in good faith and within the authority granted by the LLC’s governing documents and applicable law. The protection does not mean that every poor business decision is automatically protected.

Some LLCs also use exculpation or indemnification provisions to address potential liability. The effectiveness and scope of these provisions depend on the governing state’s law and the language of the LLC’s agreement.

Members should not assume that contract language will protect conduct that applicable law does not permit the LLC agreement to excuse or limit. Questions involving fraud, intentional misconduct, bad faith, or knowing violations of law require particular care because statutory and common-law limits may apply.

Practical Tips for LLC Members

If you are an LLC member or manager, consider these steps:

1. Read your operating agreement carefully. Look for provisions addressing management, conflicts of interest, business opportunities, voting, fiduciary duties, indemnification, and dispute resolution.
2. Disclose potential conflicts. If a business opportunity or transaction could benefit you personally, review the applicable approval and disclosure requirements before moving forward.
3. Keep records of important decisions. Document the information you considered and the reasons for significant business decisions.
4. Review your agreement when circumstances change. Changes in ownership, management, business activities, or applicable law may make an updated operating agreement appropriate.
5. Get legal advice before changing your agreement. A lawyer can help you understand which duties apply and whether your state permits the changes you want to make. Littleton Legal provides assistance with business agreements and operating agreements.

Why Reviewing Your LLC’s Fiduciary Duties Matters

Fiduciary-duty disputes can arise when members disagree about business opportunities, company property, conflicts of interest, management decisions, or the conduct of another member or manager.

Reviewing these issues before a dispute develops can help you understand your rights and responsibilities. It can also give members an opportunity to address unclear provisions in the operating agreement.

Littleton Legal works with business owners on LLC formation, governance, operating agreements, business planning, and related legal matters. You can learn more about our business law services and how we help businesses address legal issues as they grow.

Final Takeaway

LLC fiduciary duties can affect how members and managers handle company property, business opportunities, conflicts of interest, and major decisions. However, the duties that apply depend on the LLC’s management structure, operating agreement, governing state law, and the specific circumstances.

Do not assume that a rule from another state applies to your LLC. If you are forming an LLC, updating an operating agreement, facing a dispute with another member, or simply want to understand your responsibilities, legal advice can help you make informed decisions.

Need help reviewing your LLC’s fiduciary duties or operating agreement? Contact Littleton Legal at (918) 608-1836 to discuss your situation and determine what legal guidance your business may need. You can also contact Littleton Legal online.

FAQs: Fiduciary Duties in LLCs

Can I compete with my LLC?

Not necessarily. Whether an LLC member can compete with the company depends on the applicable state law, the operating agreement, the member’s role, and the circumstances. Review the relevant restrictions before pursuing a competing opportunity.

Can we remove fiduciary duties from our LLC?

It depends on the state and the LLC’s governing documents. Some states provide significant flexibility to modify or eliminate fiduciary duties, while others impose statutory limits. Texas, for example, permits an LLC company agreement to expand, restrict, or eliminate fiduciary duties under Section 101.401. Other states follow different rules.

What happens if I breach my fiduciary duties?

A breach can lead to legal claims and other remedies, depending on the applicable law and circumstances. Potential consequences may include financial damages or other court-ordered relief. The specific remedies depend on the state, the governing documents, and the nature of the alleged breach.

Does the business judgment rule protect me if I make a bad decision?

The business judgment rule can protect certain decisions when the person making the decision acts in good faith and within the scope of their authority. It does not provide automatic protection for every business decision or every type of misconduct. The rule varies by jurisdiction.

Why do states have different LLC fiduciary-duty rules?

Each state has its own laws governing LLCs. States can take different approaches to freedom of contract, fiduciary duties, operating agreements, and member protections. That is why you should apply the law governing your particular LLC rather than relying on rules from another state.