Keep Fiduciary Duties Equal

LLCs, corporations, partnerships, as well as, individuals can all be LLC owner/members of Single Member LLCs or Multi-Member LLCs (assuming the LLCs are not taxed as S-Corps).

If ownership of a multi-member LLC is a combination of individual(s) and business entities, I advise against making both individuals and business entities LLC managers (I am assuming the LLC is a Manager Managed LLC, which I recommend, and all LLC owner/members want management power).

It is unwise to have both individuals and business entities managers of the same LLC because all LLC managers have fiduciary duties to the LLC owner/members and the LLC (see Fiduciary Duties and Potential Owner/Member Liability) and when a manager is an individual, the fiduciary duties and the corresponding potential liability are on the individual. However, when a manager is a business entity (say another LLC) the fiduciary duties and potential liability are on the business entity not on the principal(s) of the business entity thus giving the principal(s) a shield from liability that the individual LLC owner/member manager does not have.

When I see the possibility of “unequal” liability for fiduciary duties, I inform all LLC owner/members and offer methods of keeping everybody in power and everyone’s fiduciary duties equal. By keeping things “equal”, LLC owner/member expectations may be protected and future internal LLC conflicts may be avoided.

“It was a wise man who said that there is no greater inequality than the equal treatment of unequals.” Justice Felix Frankfurter, Dennis v. United States, 339 U.S. 162, 184 (1950).