Fiduciary Duties of LLC Members
April 14, 2023
You and some of your friends or associates decide to create a business to provide a needed service to your community. You could open the business as a partnership, but then each of you would be personally liable for any outstanding debts or lawsuits should the business not succeed. So instead, you all agree to form a limited liability company (LLC), which protects its members (owners in an LLC are referred to as members) from personal liability.
While the LLC structure provides protection for each member’s personal assets, it also imposes what is called fiduciary duties on each member, especially if the members themselves manage the business.
If you’re a member of an LLC in or around Nashville, Tennessee, or anywhere in Rutherford County, and you have questions about your own or other members’ actions, contact the business law attorney at Brazil Clark, PLLC. Attorney Frank Brazil can assess the situation and advise you of the proper steps to take to resolve any conflicts of interest or other questionable actions.
What Are Fiduciary Duties?
Generally, the members of an LLC have two primary fiduciary duties—the duty of loyalty and the duty of care, both of which will be described more fully below. Tennessee Code Section 48-205-101 specifies that certain duties and actions of LLC members should be addressed in the articles of organization that LLC must file with the Secretary of State. Some of these issues include:
whether the LLC will be board-managed or manager-managed;
how members may be expelled;
how dissolution can take place;
how long the LLC intends to do business;
Many other fiduciary duties spring from legal and practical precedent since LLCs first came on the scene. LLCs are a fairly recent business concept. Wyoming was the first state to establish an LLC in 1977, and the IRS didn’t even recognize LLCs formally until 11 years later.
Member-Managed vs. Manager-Managed LLCs
In forming an LLC in Tennessee, you must specify whether it will be jointly managed by the members who will participate in all decision making, or whether it will be run by a manager, either one of the members or someone hired from the outside. Thus, an LLC can be either member-managed, which the code calls board-managed, or manager-managed.
The distinction is important because a member’s fiduciary duties will hinge largely on whether the LLC is member- or manager-managed and whether the LLC member has any management responsibilities. If the LLC is manager-managed, fiduciary responsibilities will fall largely on that person while the members who are not part of management will have more freedom, but they will still have a duty of good faith and fair dealing.
Fiduciary Duty of Loyalty
The duty of loyal refers to a requirement for honesty by the LLC and its members. An LLC member or manager must not engage in any conflict of interest between the company’s objectives and their own personal interests. For instance, you cannot personally amass profits from the LLC or compete directly against the LLC.
Furthermore, you cannot use the LLC’s property for your personal use, nor can you personally take advantage of an opportunity presented to the LLC by usurping it on your own. For example, if an outside party presents an investment opportunity that would benefit the LLC, then you as a manager or member cannot capitalize on that opportunity for your own personal gain.
Fiduciary Duty of Care
Duty of care refers to exercising reasonable care and acting in good faith. For instance, if your LLC is looking to purchase a commercial property and you are advising the members on the transaction, you are expected to be thoughtful and prudent. By doing so, you help set the transaction up for being made in good faith, and thus you likely won’t be held liable if the deal would ever turn south.
Can I Waive My Fiduciary Responsibilities?
Your fiduciary duties depend on the structure of the LLC. If the LLC is manager-managed, then those duties fall on the manager, and the members have more freedom. However, even in a manager-managed LLC, the non-managing members still must adhere to the duty of good faith and fair dealing. If the LCC is jointly managed by the members, then all members must embrace the duties of loyalty and care.
In some instances, you may get the other members to give you a waiver to do something that might otherwise be viewed as a breach of your fiduciary duties—perhaps to open a business on your own—but all these matters should be spelled out in the articles of organization.
Consequences for Breaching Your Fiduciary Duties
Say you engage in illicit profit-taking. The others could expel them or even take legal action. If you take out a loan in the business’s name but use the funds for your own gain, you can be held personally liable for repaying the loan. The organization should address the issue of fiduciary duties and consequences early on in the formation process so that all obligations and expectations are clear.
Understanding Your Rights and Responsibilities
If an issue arises in your LLC and you feel that someone has breached their fiduciary duty, contact Brazil Clark, PLLC immediately. Business law attorney Frank Brazail will assess the situation and advise you of the proper actions to take. His firm proudly serves clients in and around Nashville, Tennessee, and throughout Rutherford County.