The specific fiduciary duties in operating a company vary among the three most common forms of legal entities: corporation, partnership, and limited liability company.
by Nicholas Cook, Attorney, Fitzgibbons Law Offices
Sometimes the person with whom you start a business changes, or circumstances alter your business relationship. Such changes can cause your business associate to act in a manner that is in neither your best interest nor your company’s.
To protect a business and its co-owners’ interests from such situations, the law imposes a variety of fiduciary duties on actively involved partners, managing members, officers and directors.
In simple terms, a fiduciary manages another party’s assets and has a legal and ethical obligation to put the other party’s interests ahead of his or her own. A fiduciary duty is the highest standard of care to which an individual can be held. In a business setting, fiduciary duties help ensure that each owner is acting in a manner that is consistent with the entity’s business objectives and the interests of investors and the other owners.
The fiduciary duties in operating a company vary among the three most common forms of legal entities: corporation, partnership, and limited liability company (LLC).
Under Arizona law (A.R.S. § 10-830), corporate directors and officers must discharge their duties in good faith, with the care that an “ordinarily prudent person” would exercise under similar circumstances, in the best interests of the corporation.
Directors and officers must act loyally and with due care toward the corporation and its shareholders. Directors and officers are not permitted to use any information, acquired while acting in their official capacity, in a way that is detrimental to the corporation. Additionally, the duty of care mandates that, prior to acting on behalf of the corporation, directors and officers apprise themselves of all necessary information to make an informed decision.
Arizona law (A.R.S. § 29-1034) also imposes fiduciary duties on partners within a partnership. Partners owe each other, and the partnership, the duties of loyalty and due care. In fulfilling those duties, a partner is prohibited from competing with the partnership and must account to the partnership for any profits received or earned on behalf of the partnership.
An LLC is a hybrid entity that offers the limited liability of a corporation and the pass-through taxation benefits of a partnership. In contrast to the fiduciary duties imposed in corporations and partnerships, the duties owed by an LLC’s “members” are not as clearly defined.
In a 2014 case, TM2008 Investments, Inc. v. Procon Capital Corp., the Arizona Court of Appeals refused to apply specific fiduciary duties to an LLC’s members. The court found that, had the Arizona legislature wanted to impose fiduciary duties, it would have specifically done so by statute, as it did concerning corporations and partnerships. The court did point out that LLC members may create fiduciary duties by including such provisions in the LLC’s operating agreement. Operating agreements can impose on LLC members duties that are similar to those required in a partnership or corporation.
To achieve the protections and other benefits available to co-owners under their choice of legal entity, they should take at least three preparatory steps:
Understand which form of legal entity will best serve their personal and business objectives.
Gain a solid understanding of their fiduciary duties to each other and to the entity.
If they choose to operate as an LLC, seek professional guidance from their business attorney and tax professional in drafting the terms of a thorough, well-conceived operating agreement.
Nick Cook is a business and employment attorney at the Fitzgibbons Law Offices. Nick was raised in Casa Grande, attended Casa Grande Union High School, and earned his undergraduate and law degrees at Arizona State University. Before launching his legal career, Nick was a judicial extern for Arizona Court of Appeals Judge Samuel A. Thumma and a legal intern at U-Haul International. In the community, Nick volunteers his time with the Arizona Veterans StandDown Alliance, helping to provide Pinal County veterans with job interviews and finding affordable housing for veterans and their families.
Nick can be reached at 520-426-3824 or firstname.lastname@example.org.