A limited liability company (“LLC”) is one of the most favored forms of business entities because they combine the advantages of a corporation, such as limited liability and protection of their members from investor-level liability, with the advantages of a partnership, such as “pass-through tax treatment.” Additionally, LLCs are characterized by the informality of its organization and internal governance, set forth through an internal contract called the operating agreement. An LLC member can be an individual, a corporation, a partnership, another limited liability company or any other legal entity.
An LLC can be structured as a manager-managed or member-managed LLC. In a manager-managed LLC, the members appoint a manager or managers to run and manage the LLC while the members take on a more passive role. In a member-managed LLC, all the members share in managing the day-today operations of the LLC. The managers or managing members who have been charged with the responsibility of running the LLC are obliged to act in the best interest of the LLC. The duties connected to this obligation are known as fiduciary duties. The key fiduciary duties are the duty of loyalty and the duty of care. These duties are specifically defined by California law, as discussed in more detail below.
Requirements of a Fiduciary Duty
Under the duty of loyalty, a managing member or manager is required to put the interests of the LLC above any their personal interests. This loyalty is manifested through managing members and managers acting honestly in any dealings with the LLC and avoiding any conflicts of interest between the LLC’s objectives and their own personal goals. As part of the duty of loyalty, a managing member or manager may not take advantage of any LLC business opportunities or compete directly with the LLC.
Under the fiduciary duty of care, a managing member or manager must act in good faith and exercise reasonable care in carrying out their obligations to and directing the activities of the LLC. An example of the fiduciary duty of care is acting responsibly and in a reasonably prudent manner when assessing and advising the LLC in any business transactions. However, if a particular business decision is made in good faith and with reasonable care but has a negative impact on the LLC, a managing member or manager may potentially avoid liability under the business judgment rule.
In California, effective January 1, 2014, the old limited liability company statute was replaced by the California Revised Uniform Limited Liability Act (RULLCA). While the old limited liability statute only made general references to the fiduciary duties of members and managers, it did not specify the nature or scope of such duties. The RULLCA, however, specifically states that the fiduciary duties of members and managers include the duty of loyalty, the duty of care, and “any other fiduciary duty.” The RULLCA does permit members to modify, but not eliminate, the duty of loyalty subject to a “not manifestly unreasonable standard.” The RULLCA also requires full disclosure and the informed consent of the members in connection with any modification of members’ and managers’ fiduciary duties.
Contact a San Jose Corporate Lawyer for Advice Today
When considering whether to modify fiduciary duties for your California LLC, we recommend that you contact our San Jose corporate lawyers at Structure Law Group, by calling 408-441-7500 or emailing us in order to be in close compliance with the RULLCA and to discuss your own particular situation.