An Important Perspective on the Fiduciary Duties of LLCs

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More than likely, there are a few reasons that you chose to form your business as a limited liability company (LLC).  For most, there may be a presumption that your claims exposure will not impact you on a personal level.   All things considered, you should really consult with an experienced business attorney to fully understand how your company’s actions could affect you.   In the meantime, you should also know that LLCs have specific fiduciary duties.

The term fiduciary duty has a few applications in the legal world.  For example, the executor of an estate assumes fiduciary duties.  There is an expectation that the executor will comply with the terms of the decedent’s will and exhibit a duty of care concerning asset management.  Of course, the executor’s fiduciary duty includes dealing appropriately with the intended beneficiaries.

When it comes to the fiduciary duties of an LLC, there are two basic ones.  Once again, it is anticipated that the representative of the limited liability company will employ a duty of care.  Additionally, there is an expectation of a duty of loyalty.  Bottom line, the LLC must be managed in its interests, rather than personal ones.

Limited Liability Companies

First, a brief history of limited liability companies.  New Jersey first recognized LLCs over twenty years ago.   However, in 2014, the Revised Uniform Limited Liability Company Act became effective.  It might interest you to know that NJSA 42:2C-5 grants LLCs the right to file lawsuits.  Meanwhile, part of the same power allows others to engage in litigation directly against limited liability companies.

No state requires that an LLC submit a set of by-laws or operating agreement.  However, some are insistent that limited liability companies enter into operating agreements.  Although New Jersey is not one of them, it wouldn’t hurt to determine if your attorney feels it would be a good idea.

The bottom line is that regardless of an operating agreement, LLCs have inherent fiduciary duties.  A failure to comply with them could result in legal issues for your organization.

Fiduciary Duty of Care

Without question, you might guess that a fiduciary duty of care prohibits certain actions.  For example, LLCs must act in their company’s interest.  In some smaller companies, there may be a fine line between personal and company activities.   However, here are some issues that would reflect a failure to exhibit a fiduciary duty of care.

  • Failure to comply with any laws or regulations
  • Intentional malfeasance or misrepresentations
  • Absconding of funds
  • Acting in bad faith

Notwithstanding, you should be aware that the duty of care for LLCs pales in comparison to the one placed on corporations.  Basically, with a limited liability company,  there must a showing of gross negligence or willful misconduct.

Fiduciary Duty of Loyalty

The fiduciary duty of loyalty for LLC managers and members is described in NJSA 42:2C-39.  Broadly stated, there is a responsibility to provide an accounting to the company concerning “any property, profit, or benefit derived by the member.”

That said, a breach of a fiduciary duty of liability could arise in a number of situations.   For one, it could be an issue if any funds are disproportionately distributed in defiance of the operating agreement.  Additionally, competing with the LLC would violate a fiduciary duty of liability.

Need Help?

Do you need a clearer understanding of your fiduciary duties as a member of a limited liability company?  Are you concerned about a breach of those duties?  Contact the Law Offices of Lawrence M. Centanni to see how we can help!

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