Understanding the Duty of Loyalty Owed by Members of a Limited Liability Company

In business, the concept of loyalty extends beyond customer relationships to encompass the duty that partners owe to their own enterprises and business partners. Members of a limited liability company have a duty to the members to act in good faith and promote the interests of the LLC.  This duty, known as the duty of loyalty, helps maintain the integrity of the business and promotes its long-term success.

What is the Duty of Loyalty?

The duty of loyalty is a legal and ethical obligation that requires business owners to prioritize the interests of the business above their personal interests. It requires owners to act honestly and in good faith, and to avoid conflicts of interest that may harm the business. This duty is particularly important in closely-held businesses, where owners often have a significant degree of control over the company's operations.

Key Aspects of the Duty of Loyalty

1. Account for Business Profits

A member’s fiduciary duty of loyalty includes the duty to account to the LLC and hold as trustee any property, profit, or benefit derived by the member from a use by the member of the LLC’s property.  For example, if a member uses a truck owned by the company for a side job, the member should pay the company for use of the truck at the least or pay over the compensation for the job to the company because it was derived almost entirely from use of company property.

2.  Theft of Company Opportunity: 

A company opportunity is any opportunity for the company to make a profit in their line of work.  A company opportunity exists when a certain activity is reasonably related to the business’ present or prospective business and is one in which the corporation has the ability to do.  A classic theft of corporate opportunity claim is a situation where a member of the business transfers company assets to a new LLC that operates in the same line of business, in order to avoid sharing profits with business partners. 

3.  Avoiding Conflicts of Interest:

Business owners must avoid situations where their personal interests conflict with the interests of the business. This includes refraining from engaging in transactions that benefit them personally at the expense of the business.

4.  Acting in Good Faith:

Owners are expected to act honestly and in the best interests of the business. This means making decisions that are based on the merits of the situation and not influenced by personal gain.  This also means the owners cannot refuse to participate in business matters or sign documents because of a person problem or vendetta they have against another owner. 

5.  Acting Contrary to Company’s Interests:

The member’s duty of loyalty also includes refraining from dealing with the LLC as or on behalf of a person with an interest adverse to the LLC. 

Consequences of Breaching the Duty of Loyalty

Failure to uphold the duty of loyalty can have serious consequences for business owners. In addition to potential legal action, such as lawsuits for breach of fiduciary duty, owners may also face reputational damage that can harm their future business prospects. Furthermore, breaches of the duty of loyalty can erode trust among stakeholders, leading to a breakdown in the business's operations.

Conclusion

The duty of loyalty is a fundamental principle that governs the relationship between business owners and their businesses. By understanding and upholding this duty, owners can help ensure the long-term success and integrity of their businesses.  A attorney should be consulted to ensure the LLC is properly formed and that the operating agreement is properly drafted to identify these duties and give the company remedies against any owners who violate their duties.

If you are facing a theft of corporate opportunity matter or a situation where a member of the company is violating their duty of loyalty, it’s crucial to have experienced representation to help you navigate the legal process. The Pittsburgh and Philadelphia business attorneys at Fiffik Law Group provide skillful counsel for a wide variety of commercial matters, including those involving theft of corporate opportunity claims. Call (412) 391-1014 or send us a message to learn more about how we can help.