“What Fiduciary Duties Do I Owe My Business Associate?”
The specific fiduciary duties in operating a
company vary among the three most common forms of Arizona legal entities:
corporation, partnership, and LLC.
Note: While the information contained in this
article is accurate as of its publication date, 2018 passage of the Arizona
Limited Liability Company Act will impose major changes for LLCs formed on or
after September 1, 2019, and for all Arizona LLCs, regardless of their formation
date, beginning September 1, 2020. See David Fitzgibbons'
article for more information.
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 on actively involved partners, managing
members, officers and directors a variety of fiduciary duties.
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
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.
See related article:
Formation of an Arizona Corporation
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.
Formation of an Arizona Partnership
Limited Liability Companies
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.
Formation of an Arizona Limited Liability Company (LLC)
To achieve the protections and other benefits available
to co-owners under their choice of legal entity, they should take at least three
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; and
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.