By Tricia Dunlap Esq.
~2 minute read
Part 5 – LLC Education Series
Fiduciary Duties: The Responsibilities You Never Knew You Had
Good faith and fair dealing.
Sometimes these seem like quaint concepts. A throwback to a kinder era.
In reality, they are implied responsibilities and “fiduciary duties” that can be used to protect an LLC and/or its members from foul play. The Virginia Limited Liability Company Act does not impose fiduciary duties on LLC members but members can choose to include them in their LLC operating agreements and, by doing so, give both members and the LLC itself additional legal protections.
This post is # 5 in our LLC Education Series:
- What Exactly IS a LLC, Anyway?
- Operating Agreements – Essential to Your Success
- The Perilous Position of Minority Members
- Hotel California: You Can Checkout, But You Can Never Leave
- Fiduciary Duties: The Responsibilities You Never Knew You Had
What Are Fiduciary Duties?
The Duty of Good Faith
The duty of good faith means that the members or manager of an LLC must deal with one another and the LLC honestly and fairly. Their business decisions must be subjectively honest and honorable. Aligned with the fiduciary duty of good faith is its sister concept of “fair dealing” which arises by implication and applies to everyone who signs a contract (such as an LLC operating agreement). The implied covenant of fair dealing requires all parties to a contract to be honest, fair, and reasonable with one another.
The Duty of Loyalty
If an LLC’s operating agreement includes the duty of loylty, then LLC members or managers will be required to prioritize the best interests and welfare of the company over their own personal or other business interests. Members or managers who compete with the LLC, engage in self-dealing (such as using LLC funds to pay a personal debt), or conflicts of interest (such as having the LLC hire an unqualified family member) may risk violating their duty of loyalty to the LLC. If the LLC’s OA includes this fiduciary duty, then other members can use it to protect the LLC and their membership interest from a rogue member or manager.
Duty of Care
Finally, you may want to consider including the duty of care in your LLC’s Operating Agreement. This fiduciary duty requires members or managers acting for the LLC to use appropriate care
and diligence when doing so. They should be prudent in carrying out their responsibilities to the company by, for example, hiring experts such as CPAs and attorneys to advise them prior to making decisions, or putting in the time and effort necessary to thoughtfully study an issue before voting on it. This fiduciary duty is usually combined with a “safe harbor” known as the business judgement rule (BJR). The BJR protects a member or manager from liability for a business decision that turned out badly if they made it in good faith and with reasonable care.
Except for the implied covenant of fair dealing, Virginia law does not impose any of these fiduciary duties on LLC members. The only way to add these protections is to have an experience business attorney draft a tailored OA for your LLC.
Contact Dunlap Law
We’re here to help you if you need some advice. It’s not just about having an operating agreement drafted and in place, it’s about getting the right counsel from a good lawyer who can help you protect your interests. Please get in touch.
Subscribe to our YouTube channel and subscribe to receive alerts on new blog posts!