Fiduciary Duties and Potential Owner/Member Liability

Ownership of an LLC comes with certain “mandatory” legal duties pursuant to the South Carolina LLC Act (see “Mandatory” Rules of the South Carolina LLC Act). These duties are called “fiduciary duties” and they are legally imposed standards of action. This is important because with legal duties comes potential liability for those with the duties - the LLC owner/members.

These duties are imposed on anyone with the right to manage the LLC (whether or not they actually manage) and on any LLC owner/member that actually does manage the LLC (whether or not they have the right to manage).

There is a duty to be careful, a duty to be loyal, a duty to manage in good faith, and a duty to deal fairly with the LLC and LLC owner/members. Where it is permissible to modify these fiduciary duties I generally recommend they be modified and then do so based on client responses the firm’s Pre-Organization Questionnaire Letter.

These fiduciary duties are discussed again in my Attorney Letter on doing business as an LLC that is mailed to the clients with the draft operating agreement. The hope is LLC owner/members are less likely to breach the fiduciary duties if they are somewhat familiar with the duties or at least have a nagging memory about there being rules on what acting LLC managers should and should not do (see also Keep Fiduciary Duties Equal, Standard of Negligence - Fiduciary Duty of Care, and Competing with the LLC - Fiduciary Duty of Loyalty).

When I organized “Form” LLCs, whether and to what extent fiduciary duties were modified depended upon which “form” I used.

“The orbit of the danger as disclosed to the eye of reasonable vigilance would be the orbit of the duty.” Judge Benjamin N. Cardozo, Palsgraf v. Long Island R.R., 248 N.Y. 339, 343, 162 N.E. 99, __ (1928).