Competing with the LLC-Duty of Loyalty

If the South Carolina Statutory Default Rules control (meaning the written LLC Operating Agreement is silent on the duty of loyalty), LLC owner/members and/or LLC managers are potentially liable to the LLC if they compete with the LLC (see also Fiduciary Duties and Potential Owner/Member Liability). This is a potential problem because if, for example, the LLC owns rental property in Charleston, then any LLC owner/member or manager who owns different rental property in Charleston is arguably competing with the LLC and thus arguably liable to the LLC.

Now that I draft my own LLC Operating Agreements, I ask clients in the Pre-Organization Questionnaire Letter about their feelings and understanding on “competing” with the LLC and incorporate their responses into the LLC operating agreement.

To reduce possible future surprise and friction among LLC owner/members, I recommend spelling out exactly what level of competition is allowed and exactly what type of business or activity is permissible, things I did not do when I organized “Form” LLCs (see also Why “Form” LLC Operating Agreements Are Usually Not Modified).

This is another area where an LLC Operating Agreement expanded in scope offers clients extra value and protection (see Options and Choices).

“It is too much to expect loyalty against self-interest.” Rene A. Wormser, Wormser’s Guide to Estate Planning (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1958) p. 116.