Fitzgibbons Law Offices - Casa Grande and Maricopa Lawyers

520-426-3824

 
 
 

Nick Cook, Casa Grande Business Attorney

 

Fitzgibbons Law Offices
1115 E. Cottonwood Lane
Suite 150
Casa Grande, AZ 85122

Golden Corridor Living

This article appeared in the Early Summer 2018 issue of Golden Corridor Living Magazine

Business Law

March 2018

“What Fiduciary Duties Do I Owe My Business Associate?”

The specific fiduciary duties in operating a company vary among the three most common forms of Arizona legal entities: corporation, partnership, and LLC.

Note: While the information contained in this article is accurate as of its publication date, 2018 passage of the Arizona Limited Liability Company Act will impose major changes for LLCs formed on or after September 1, 2019, and for all Arizona LLCs, regardless of their formation date, beginning September 1, 2020. See David Fitzgibbons' article for more information.

Sometimes the person with whom you start a business changes, or circumstances alter your business relationship. Such changes can cause your business associate to act in a manner that is in neither your best interest nor your company’s.

To protect a business and its co-owners’ interests from such situations, the law imposes on actively involved partners, managing members, officers and directors a variety of fiduciary duties.

In simple terms, a fiduciary manages another party's assets and has a legal and ethical obligation to put the other party's interests ahead of his or her own. A fiduciary duty is the highest standard of care to which an individual can be held. In a business setting, fiduciary duties help ensure that each owner is acting in a manner that is consistent with the entity’s business objectives and the interests of investors and the other owners.

The fiduciary duties in operating a company vary among the three most common forms of legal entities: corporation, partnership, and limited liability company (LLC).

Corporations

Under Arizona law (A.R.S. § 10-830), corporate directors and officers must discharge their duties in good faith, with the care that an “ordinarily prudent person” would exercise under similar circumstances, in the best interests of the corporation.

Directors and officers must act loyally and with due care toward the corporation and its shareholders. Directors and officers are not permitted to use any information, acquired while acting in their official capacity, in a way that is detrimental to the corporation. Additionally, the duty of care mandates that, prior to acting on behalf of the corporation, directors and officers apprise themselves of all necessary information to make an informed decision.

See related article: Formation of an Arizona Corporation

Partnerships

Arizona law (A.R.S. § 29-1034) also imposes fiduciary duties on partners within a partnership. Partners owe each other, and the partnership, the duties of loyalty and due care. In fulfilling those duties, a partner is prohibited from competing with the partnership and must account to the partnership for any profits received or earned on behalf of the partnership.

See also: Formation of an Arizona Partnership

Limited Liability Companies

An LLC is a hybrid entity that offers the limited liability of a corporation and the pass-through taxation benefits of a partnership. In contrast to the fiduciary duties imposed in corporations and partnerships, the duties owed by an LLC’s “members” are not as clearly defined.

In a 2014 case, TM2008 Investments, Inc. v. Procon Capital Corp., the Arizona Court of Appeals refused to apply specific fiduciary duties to an LLC’s members. The Court found that, had the Arizona legislature wanted to impose fiduciary duties, it would have specifically done so by statute, as it did concerning corporations and partnerships. The Court did point out that LLC members may create fiduciary duties by including such provisions in the LLC’s operating agreement. Operating agreements can impose on LLC members duties that are similar to those required in a partnership or corporation.

See also: Formation of an Arizona Limited Liability Company (LLC)

Conclusion

To achieve the protections and other benefits available to co-owners under their choice of legal entity, they should take at least three preparatory steps:

•  understand which form of legal entity will best serve their personal and business objectives;

•  gain a solid understanding of their fiduciary duties to each other and to the entity; and

•  if they choose to operate as an LLC, seek professional guidance from their business attorney and tax professional in drafting the terms of a thorough, well-conceived operating agreement.