LLC Members’ Fiduciary Duties of Care and Loyalty
Members of a Limited Liability Company (LLC) owe certain fiduciary duties to the LLC and each other under Illinois law. Among the most important are the duties of care and loyalty. Unfortunately, LLC members can sometimes violate their fiduciary duties to the company by placing their own interests above the interests of the company or other LLC members. It’s vital for LLC members to fully understand their obligations — and the repercussions of breaching these duties.
What is an LLC Member’s Fiduciary Duty?
A fiduciary duty is a legal obligation that requires an LLC member to act in the best interests of the company. In a member-managed LLC, all members owe a fiduciary duty to one another since they all have input regarding the LLC’s operations. In contrast, in a manager-managed LLC, one member — the manager — is responsible for handling the operations of the company and owes a fiduciary duty to the other members.
Specifically, the fiduciary duties of LLC members help to ensure all members or managers of an LLC put the interests of the LLC above their own. These duties include both the duty of loyalty and the duty of care, as well as the duty to refrain from competing with the LLC and the duty to act fairly toward the company.
What is the Duty of Care?
The duty of care is a fiduciary duty that requires the LLC members to act in good faith, with the same level of care that a reasonably prudent person would set forth when fulfilling their obligations to the company. For example, an LLC member is expected to be thoughtful and prudent when purchasing property and advising other members. As long as an LLC member complies with the duty of care, they would likely be protected from liability in the event the deal did not work out.
Pursuant to the duty of care, an LLC member may not:
- Engage in intentional or reckless conduct
- Engage in grossly negligent conduct
- Knowingly violate the law when it comes to the LLC
Significantly, an LLC member’s duty of care and good faith also extends to wind-up situations. In such cases, they must still act fairly to the LLC, even if they have adverse interests. An LLC member must not compete with the interests of the company until the LLC has been dissolved.
What is the Duty of Loyalty?
Simply put, the duty of loyalty requires that an LLC member put the interests of the company above their own. An LLC member must not only account to the LLC, but they must also not engage in any conflicts of interest when it comes to their own financial interests and the company’s objectives. In addition, an LLC member may not use the LLC’s property for their own personal use — or capitalize on an opportunity that would benefit the LLC for their own economic gain.
In other words, an LLC member must act honestly, avoid conflicts of interest, and not take advantage of the LLC’s business opportunities for themselves. In some instances, an LLC member may be permitted to receive a personal benefit, as long as they’ve disclosed the deal and received approval from the LLC.
What Happens if an LLC Member Violates Their Fiduciary Duties?
Breaching a fiduciary duty can come with serious consequences. If it can be established that an LLC member breached their fiduciary duty, the LLC may be entitled to recover monetary damages to compensate for things like loss of business opportunities, loss of profits, and the wrongdoer’s unjust enrichment. In cases where fraud or egregious conduct can be shown, a court might award punitive damages — this category of damages is meant to serve as a deterrent to others and punish the defendant. A judge might also impose equitable remedies in cases involving an LLC member’s breach of duty of care or loyalty, such as an injunction or the appointment of a receiver.
Can an LLC Member Waive Their Fiduciary Duties?
As of 2017, the Illinois Limited Liability Company Act permits LLC members to waive their fiduciary duties or eliminate them, except for the duty of care. However, this must be specified in the operating agreement using clear and unambiguous language. An operating agreement may also alter the duty of care — but it may not authorize a violation of the law or intentional misconduct.
Contact an Experienced Business Law Attorney
If you are facing an LLC breach of fiduciary duty claim, it’s crucial to have the guidance of an experienced attorney. Located in Rolling Meadows, Litico Law Group serves the needs of LLCs and LLC members throughout Illinois for a wide variety of legal matters. We welcome you to contact us or give us a call at (847) 307-5942 to schedule a consultation to learn how we can assist you.