State law dictates the type and level of fiduciary duty a member or manager of a limited liability company owes to the LLC. Although there are slight variations across states, most jurisdictions require the same minimum standards. Members who act in a way contrary to the proscribed standards are liable to the LLC for any damages it suffers as a result of the breach of fiduciary duties.
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Each LLC member and manager must ensure not to be grossly negligent when acting on behalf of the business to avoid damage to the LLC. This duty does not extend to behavior that is ordinarily considered negligent. There is no clearly defined legal standard for distinguishing gross negligence from ordinary negligence, as all facts and circumstances are relevant to the determination. For example, a member who causes a car accident when driving a company vehicle at 100 mph in a 40 mph zone is grossly negligent. In contrast, if the member adheres to the speed limit and hits another vehicle because he was changing a radio station, this is most likely due to ordinary negligence, relieving the member from personal liability.
Third Party Damages
Members conducting activities within the scope of LLC business owe a duty of care to prevent damage to a third party. This includes any activity that may cause the LLC to incur a liability for injuring a third party as a result of breaking the law or acting in a reckless manner. For example, if the member who speeds in the 40 mph zone while driving a business vehicle receives a ticket, the member may be personally liable to the LLC if the business is responsible for paying the ticket.
A duty of loyalty to the LLC requires members to refrain from acting in any way that can potentially have adverse consequences to the business. A breach of this duty includes usurping potentially profitable opportunities of the LLC for personal gain, or acting on behalf of a third party in a way that may damage the LLC or minimize its ability to conduct business. However, a member who obtains personal profit from opportunities that are outside the scope of the LLC’s business, not in direct competition with the LLC or which the LLC has decided not to pursue are not breaches of the loyalty duty.
A state’s fiduciary duty requirements are subject to alteration by the LLC’s members upon a valid ratification of a particular member’s activities. A valid ratification occurs when all other members obtain full disclosure of the facts and circumstances surrounding the potentially breaching activity and all members agree to relieve the particular member of personal liability. However, the operating agreement can stipulate the amount of votes necessary to relieve the member of liability such as a majority rather than unanimous vote.
References & Resources
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, Ph.D.; 2010
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006