Can My LLC Business Partner Compete Against Our Business? (Well, what fiduciary duties does he or she owe you?)
As a business owner, you have a lot to think about when it comes to protecting your company's assets and interests. One issue that may arise is whether your LLC business partner can compete against your business. The answer depends on what fiduciary duties are owed by the members. If your business is a corporation or a type of partnership, the answer may be easier to provide because the law is better developed and clear for those entities. But as LLC owners, this important question may be a little more complicated due to determining the fiduciary duties your business partner may or may not owe to you or your LLC, which is dependent on your Operating Agreement, case law from courts, or the LLC law.
Fiduciary duties are the obligations that LLC members and managers owe to each other and to the LLC. These duties include the duty of loyalty, which requires the LLC members and managers to act in the best interests of the LLC and not in their personal interests. They also include the duty of care, which requires the LLC members and managers to act with the care that a reasonably prudent person would exercise in similar circumstances.
Smart business owners address the fiduciary duties topic in their LLC Operating Agreement. In that document, you can decide which duties apply to each members or whether no duties apply. If you fail to do so, however, then LLC law and case law govern, the results of which may surprise you. For example, New York court decisions provide some guidance regarding LLC fiduciary duties, however, they differ at times from the LLC law. As of this writing, absent differing language in an Operating Agreement, New York courts hold that New York law does not impose a fiduciary duty on non-managing members of an LLC. This means that if your business partner is a non-managing member of your LLC, they may not owe a fiduciary duty to you or the LLC and may be able to start and operate a competing business.
However, if your business partner is a managing member of your LLC, then they do owe a fiduciary duty to you and the LLC (and to any other members). This duty requires them to act in the best interests of the LLC and not in their personal interests. If they breach this duty by competing against the LLC, they could be held liable for any damages that result from their actions.
When LLC members and managers owe a duty of loyalty to the LLC, that duty requires them to act in the best interests of the LLC and not in their personal interests. If your business partner is competing against your LLC, they may be violating this duty of loyalty. If this is the case, you may be able to take legal action to protect your business.
In summary, whether your LLC business partner can compete against your business depends on their role within the LLC. Non-managing members of an LLC generally do not owe a fiduciary duty to the LLC or its other members, while managing members do owe this duty. If your business partner is competing against your LLC, they may be in breach of their fiduciary duties and you may be able to take legal action to protect your business.
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