Chapter 5: Fiduciary Duties in the Context of the Limited Liability Company

American Bar Association Litigation Section

Chapter 5: Fiduciary Duties in the Context of the Limited Liability Company

Litigating Fiduciary Duty Claims is a practical guide for lawyers who are either beginning a fiduciary litigation practice or handling a fiduciary duty case in an unfamiliar area.

Chapter 5

I. Introduction

The ubiquity of the limited liability company as an entity form throughout the United States in the last several decades has often been described as a “much heralded development in corporate law.”1 This entity form, first made available in the state of Wyoming in 1977, offered the benefit of a limitation on personal liability (much like a corporation) for its “members,” while enabling its members to treat the income generated from their interest as a pass-through for taxation purposes (much like a partnership). The limited liability company (LLC) statutes adopted throughout the United States thus created a hybrid entity that offers flexibility for the members and other participants in the entity to customize their relationships by contract. The LLC statutes established entities that “are creatures of contract, ‘designed to afford the maximum amount of freedom of contract, private ordering and flexibility to the parties involved.’”2 All 50 states and the District of Columbia have enacted LLC legislation.

The LLC entity form affords novelty and flexibility that create its own set of issues for determining whether certain actors within the entity are bound by fiduciary duties, and to whom. This chapter explores some of these unique issues in the LLC context, including the source of the fiduciary duty; a discussion of who owes fiduciary duties; to whom such duties are owed; how the duties differ in the context of “member-managed” versus “manager-managed” LLCs; and the extent to which statutory, common law, and the contractual agreements bind the LLC and its participants.

II. Fiduciary Duties

Fiduciary duties consist of the duty of loyalty and the duty of care. The duty of loyalty requires the fiduciary to act with undivided loyalty to the LLC. It mandates that the best interests of the company take precedence over any personal interests or individual advantages possessed by an officer, director, or member that are not shared by the company generally. Failure by such actors to fulfill a duty of loyalty usually includes some form of self-dealing or misuse of corporate office for personal gain.3 Corporate decisions that confer a benefit (indirectly or directly) upon a participating director, officer, or member can implicate the duty of loyalty.


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Published with permission from the American Bar Association.