Fiduciary relationships exist in many different contexts: corporation/officers and directors, trust company/depositor, attorney/client. When a fiduciary relationship exists, the fiduciary (i.e., officers and directors, trust company or attorney) typically owes fiduciary duties to the beneficiary (i.e., corporation, depositor or client). In the context of a limited liability company (“LLC”), the managers (officers in a corporation) and members (shareholders in a corporation) may owe fiduciary duties to other members and managers, or to the LLC itself, and can be held personally liable for breaching those duties.
The courts have stated that a “fiduciary relationship” may arise as a matter of law by virtue of the parties’ relationship, or it may arise as a result of the special circumstances of the parties’ relationship where one places trust in another so that the latter gains superiority and influence over the former. The question in determining whether a fiduciary relationship exists is whether or not trust is reposed with respect to property or the business affairs of the other.
The powers, rights and duties of persons in an LLC are typically outlined in an operating agreement and controlled by the applicable statutes of the state in which the LLC is organized. The statutes act as a default, but because the law governing limited liability companies in each state values freedom of contact, in certain circumstances the LLC can alter and limit the statutory fiduciary duties owed if the members so desire. In determining what duties are owed, the organization of the LLC is of utmost concern. Whether the LLC is member-managed or manager-managed can also change who owes fiduciary duties.
Duty of Care
The Missouri Limited Liability Company Act provides that members of a member-managed LLC owe a duty of care to the LLC, its members, managers and other parties bound by the operating agreement. Under Section 347.088.1, RSMo., members have a duty to act “in good faith, with the care a corporate officer of like position would exercise under similar circumstances, in a manner a reasonable person would believe to be in the best interest of the LLC.” Managers of a manager-managed LLC have this same duty of care, but members in a manager-managed LLC do not. Members who do not act as managers have no duty to the company solely by being a member of the LLC.
In contrast, the Illinois Limited Liability Company Act establishes a different standard for the duty of care. In Illinois, the duty of care is limited to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.” Unlike the Missouri statute, which includes an element of good faith within the standard of care, the duty to act in good faith is addressed in a separate provision of the Illinois LLC Act. It is important to note that Illinois law limits the freedom to contract more than Missouri law does. Under ILCS 805 Section 180/15-5(6), the operating agreement of a limited liability company may not eliminate or reduce fiduciary duties, but it may outline specific types or categories of activities that do not violate the duties. Also, the operating agreement can provide a standard for which to measure the performance of good faith and fair dealing.
Duty of Loyalty
Under the Missouri LLC Act, any profit or benefit derived by a member of a member-managed LLC, unless the operating agreement provides otherwise, or a manager obtained without the consent of more than one-half of disinterested members or managers from a transaction associated with the conduct of the business or the winding up of the LLC’s affairs, must be accounted for to the LLC and held in trust under the duty of loyalty.
Similarly, the duty of loyalty under the Missouri LLC Act prohibits any personal use by a member of a member-managed LLC or manager of a manager-managed LLC of the LLC’s property, including confidential or proprietary information, or other matters entrusted to such member or manager.
The Illinois LLC Act imposes the same duty of loyalty as required under the Missouri LLC Act, but goes further by expressly requiring such a member or manager to act fairly when a member or manager deals with the company, either in the ordinary conduct of business or in winding up of affairs when such member or manager is acting as or on behalf of a party having an interest adverse to the LLC. The Illinois LLC Act also prohibits a member or manager from competing with the LLC prior to the dissolution of the LLC.
However, under the Illinois LLC Act, members not exercising any managerial authority, unless managers of the LLC, owe no duty to the company solely by reason of being a member.
Duty of Good Faith
Under both the Missouri and Illinois LLC Acts, the duty of good faith is integrated into the duty of care, except for members in Illinois member-managed LLCs, where members are expressly obligated to discharge their duties with the obligation of good faith and fair dealing.
The following chart highlights the duties of members and managers in both Missouri and Illinois.
Member-Managed LLCs
Fiduciary Duties of Members
Missouri
- Duty of Care: Duty to act in good faith, with the care a corporate officer of like position would exercise under similar circumstances, in the manner a reasonable person would believe to be in the best interest of the LLC. [Section 347.088.1 RSMo]
- Duty of Loyalty: Duty to account to the LLC and hold as trustee for it any profit or benefit derived by such person without the informed consent of more than one-half by number of disinterested managers or members from any transaction connected with the conduct of the business and affairs or the winding up of the LLC, or from any personal use by such person of the property of the LLC, including confidential or proprietary information of the limited liability company or other matters entrusted to him as a result of his status as manager or member. [Section 347.088.3 RSMo]
- Duty of Good Faith: Integrated into the Duty of Care.
Illinois
- Duty of Care: Limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. [ILCS 805 Section 180/15-3(c)]
- Duty of Loyalty: Duty to (1) account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company’s business or derived from a use by the member of the company’s property, including the appropriation of a company’s opportunity; (2) to act fairly when a member deals with the company in the conduct or winding up of the company’s business as or on behalf of a party having an interest adverse to the company; and (3) to refrain from competing with the company in the conduct of the company’s business before the dissolution of the company. [ILCS 805 Section 180/15-3(b)]
- Duty of Good Faith: Shall discharge duties consistent with the obligation of good faith and fair dealing. [ILCS 805 Section 180/15-3(d)]
Manager-Managed LLCs
Fiduciary Duties of Managers
Missouri & Illinois
- Duty of Care / Duty of Loyalty / Duty of Good Faith: Same Duties as a Member of a Member-Managed LLC
Manager-Managed LLCs
Fiduciary Duties of Members
Missouri
- Duty of Care: Members who do not act as managers have no duties to the company or other members of the LLC solely by being a member. [Section 347.088.4 RSMo]
- Duty of Loyalty: Unless provided for otherwise in the operating agreement, members of a Manager-Managed LLC have the same duties as a member of a Member-Managed LLC. [Section 347.088.4 RSMo]
- Duty of Good Faith: No duty, because good faith is integrated into the duty of care.
Illinois
- Members who do not exercise managerial authority, or who are not also managers, owe no duty to the company or other members of the LLC solely by reason of being a member. [ILCS 805 Section 180/15-3(g)(1)]
Conclusion
Matters of relationship in business are frequently defined by statute, but may, if permitted under those statutes, be modified if not entirely eliminated. Understanding your options in the formation of your limited liability company, corporation or other business entity should not be underestimated.