This is the third in a series of Monitor columns I’m writing about LLC fiduciary duties. I hope my columns are useful to New Hampshire LLC members. I’ll appreciate their feedback.
Fiduciary duties are, of course, first and foremost, legal duties. If you breach them, you could get sued. But they also constitute the ethical code of multi-member LLCs and their team spirit. So if you’re one of the roughly 40,000 individuals who are members of New Hampshire multi-member LLCs, the fact that you have a practical understanding of these duties can be critically important for the success and sometimes even for the survival of your LLC. It’s one thing to be a member of an LLC. It’s quite another to understand your LLC. And ownership without understanding is dangerous.
My purpose in this column is to introduce the most complex of New Hampshire LLC fiduciary duties — namely, the duty of loyalty. It’s set forth in Section 110 of the New Hampshire LLC Act (the “NHA”). In subsequent columns, I’ll provide some key duty-of-loyalty details.
To understand the duty of loyalty, you need first of all to know the general definition of the duty. Then you need to know and understand its eight subsidiaries duties.
At its most basic, the duty of loyalty means the duty, in all matters relating to your LLC, to put the LLC first and yourself second. This obviously doesn’t mean, for example, subordinating the interests of your family to those of your LLC. But it does mean disclosing to your co-members, when you first form your LLC and thereafter, any family or individual interests of yours that may undercut your ability to fulfil your LLC responsibilities. To fail to do so can be a breach of your duty of care. But it can also be a breach of your duty of loyalty.
So, if you and the co-members of your LLC haven’t already expressly disclosed to one another all family and individual interests that might eventually pose significant conflicts with your commitment to your LLC, you should do soon. For example, you might have a duty to disclose personal or family health issues — for example, that fact that you or a family member have early-stage Alzheimer’s or Parkinson Disease. Depending on the non-LLC interests in question, the disclosure may require the use of a written non-disclosure agreement.
But to have a really practical understanding of the duty of loyalty, you have to understand not only the general duty but also each subsidiary duty. I’ll briefly state these subsidiary duties below, and I’ll explain the more important ones in detail in future columns.
As a member of your multi-member LLC, you have subsidiary duties of loyalty:
1. Not to compete against your LLC;
2. Not to engage in self-interested transactions with your LLC;
3. Not to usurp business opportunities potentially valuable to your LLC;
4. To maintain the confidentiality of confidential LLC information;
5. To disclose to your co-members information of which you become aware that is relevant to your LLC;
6. To use the property of your LLC only for the LLC’s benefit and not to benefit yourself;
7. To avoid “improper personal benefits”; and
8. To act toward your LLC and your co-members with fiduciary good faith.
A few of the above subsidiary duties are self-explanatory. Many are not.
John Cunningham is a lawyer licensed to practice law in NH and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net or visit llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.
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December 12, 2021 at 03:03PM
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Law in the Marketplace: The LLC Duty of Loyalty — the big picture - Concord Monitor
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