As an member managed LLC member, part of your role is to act in good faith and put the interests of the LLC above your own. Your fiduciary duty includes making decisions that are in the best interest of the LLC. It’s also crucial that you do not take advantage of your position as a member. Let’s look at your role in a member managed LLC and see how your fiduciary duties affect you and your business.
Your Operating Agreement Specifies Your Duties
When starting an LLC, it’s essential to consider how to manage your members’ accountability and liability.
- What happens if a member has lousy judgment and contracts with others in a way that hurts the business?
- Are they liable for negligence?
- What types of duties and responsibilities do they owe the LLC?
- How can the other members protect themselves in this situation?
LLC members possess fiduciary rights, duties, and obligations. As an LLC member, it’s likely that you owe a fiduciary duty to the company.
The two critical fiduciary duties are the duty of loyalty and the duty of care. Whether you have a fiduciary duty depends on the LLC’s management structure, operating agreement, and your role in the company. To avoid liability, you need to understand your duties as a member.
What Are Your Fiduciary Duties as an LLC Member?
Fiduciary is from the Latin word fiduciarius, which means confidence and trust. A person or entity (fiduciary) with the power and obligation to act for another person or entity (beneficiary) must be trustworthy, act in good faith, and be honest.
What is a Fiduciary’s Duty of Loyalty?
Under the duty of loyalty, a fiduciary must put the LLC’s success and benefits above individual gain. A fiduciary must act honestly in any dealings with the LLC. They must also avoid any conflicts of interest between the LLC’s goals and their own personal goals. In some instances, a member may be allowed to benefit from an LLC opportunity. However, this is only if the member provides prior full disclosure to the LLC and receives the LLC’s approval.
Examples of the duty of loyalty that an LLC may impose on a member include:
- Account to the LLC for any LLC property that the member holds.
- Refrain from dealing with the LLC on behalf of an interest adverse to the LLC.
- Refrain from competing with the LLC.
What is a Fiduciary’s Duty of Care?
An LLC holds a fiduciary to a higher standard of conduct and trust than that required of a casual business person. The duty of care requires that members or managers act in good faith and exercise a certain level of care in fulfilling their obligations to and directing the activities of the LLC.
For example, suppose the LLC is considering a significant acquisition. In that case, a fiduciary must act responsibly and in a reasonably prudent manner in assessing the terms and in advising the LLC about the potential transaction.
Under the business judgment rule, a fiduciary is typically not liable for business decisions made in good faith and with a certain level of care, even if they eventually adversely impact the LLC.
The duty of care imposed on a member may be one of the following standards:
- Ordinary Negligence – to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the LLC.
- Gross Negligence – to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
- Intentional Acts – to refrain from willful misconduct or a knowing violation of the law.
Limiting a Member’s Rights, Duties, & Obligations
According to NC § 57D-2-30, there are specific ways you may not write your LLC operating agreement. However, we are one of a few states where you may write an operating agreement that gives more freedom to your LLC members.
The operating agreement may:
- Allow a disinterested or independent person to authorize specific acts or transactions
- Alter or eliminate the aspects of the duty of loyalty
- Identify specific types or categories of activities that do not violate the duty of loyalty
- Alter the duty of care but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law
- Alter or eliminate any other fiduciary duty (1)
A member of a member-managed LLC owes a duty of loyalty and care to the LLC and other members. However, In North Carolina, members may limit these duties. It all comes down to how the members write the operating agreement. Seeking the advice of an experienced business attorney can help your LLC get the nuances of your contract worked out for your best interests as a company.
We Can Help
When it comes to LLCs, the rules are complex and unique. Each LLC has its own situation that requires analysis of what is best. Our North Carolina business attorneys at Hopler, Wilms, and Hanna complete a comprehensive review of your LLC operating agreement and the governing state law to help you understand any fiduciary duties you may owe to an LLC. And if you need help drafting or reviewing your LLC operating agreement, we can help with that too.
Don’t hesitate to reach out to our experienced business attorneys with any questions or concerns about your business. Give us a call today to set up a consultation. We look forward to working with you.