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Limited Liability Companies

Financial District

A Limited Liability Company (LLC) is a popular choice among business owners due to the legal structure allowing the preferable features of a corporation and the tax and operational flexibility of a partnership. If you have questions on how to form an LLC and what to consider when forming an LLC, it is of the utmost importance to seek the advice of an experienced business law attorney. Things to consider include, but are not limited to, the following:

  • Choosing a business name; or

  • Filing Articles of Organization; or

  • Drafting an operating agreement; or

  • Obtaining the required licenses and permits.

Before we delve into the fiduciary duties of members in an LLC, it is important to note beforehand that all owners or those individuals with a vested interest in the LLC are referred to as “members.” Any profits and losses are shared equally with the members of the LLC and members will report the profits and losses on their federal tax return similar to that of a partnership.

Fiduciary Duties Owed by Members to the LLC

There is the Revised Uniform Limited Liability Company Act (RULLCA) that went into effect this year. RULLCA specifically delineates the fiduciary duties of members in an LLC, but those duties are primarily limited to the duty of care and duty of loyalty. (California Corporations Code Section 17704.09.)

Duty of Loyalty. A broad and general summary of the duty of loyalty, which can be explained as members/managers acting within their capacity to ensure that there is no competition with the LLC and that they do not deal adversely to the LLC.

Duty of Care. The duty of care clearly states that members in the conduct of its business and winding up of the activities is limited to refraining from grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.

It’s important to note however, that despite these two fiduciary duties, managing members and managers can modify fiduciary duties, but to a very limited extent. This means that any and all modifications made to fiduciary duties must be written in an operating agreement. It is agreed that the duty of care, duty of loyalty, and the essential contractual duty of good faith and fair dealing may not be removed, although the duty of care may be reasonably reduced.

What to do now

If you or someone you know is involved in the establishment of an LLC, it is important that all members or managing members are aware that they are abiding with their fiduciary duties.

In those moments, you need Orange County’s business lawyer – The Law Offices of Kalab A. Honey.


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