A fiduciary duty is a duty or responsibility to act in someone else’s best interest. Similarly, in a business context, fiduciary duties are obligations a person or entity owes to its business, clients, or employees. In small businesses or partnerships, the only fiduciary duties owed are duties of loyalty and care. Fiduciary duties are typically created by statutory or judge-made law.
What are the two main fiduciary duties?
As it was mentioned, in small businesses or partnerships, the only fiduciary duties owed are duties of loyalty and care.
The duty of loyalty is the duty to primarily consider the business in making decisions that would essentially benefit the company. Examples of breaching or failing the duty of loyalty include competing with the partnership or business, taking a personal business opportunity from which the partnership or business may have benefitted or may have needed, using the business or partnership for personal gain, or engaging in a conflict of interest. Simply put, the duty of loyalty is to put the business and its interests first.
Duty of care is the duty to avoid grossly negligent, intentional, or reckless conduct. In other words, if the business owners, employees, or partners knowingly violate the law in connection with the partnership or business, they would be breaching the duty of care. For example, say there is a small delivery business that employs three drivers. If one of the drivers acts negligently or recklessly (taking red lights, drinking and driving, etc.) while on the job, they would be breaching the fiduciary duty of care.
When forming a business or partnership, State laws specify that operating agreements are not allowed to eliminate the duty of loyalty and cannot eliminate or unreasonably reduce the duty of care. However, the fiduciary duty of care and loyalty may be modified or even entirely limited in an LLC’s (Limited Liability Company). Even so, the LLC may not eliminate the implied covenant of good faith and fair dealing.
In small businesses, the main fiduciary duty is the duty to refrain from taking personal advantage of corporate opportunities that belong to the company or business. A breach in either one of these duties by business owners can result in a lengthy lawsuit.