By Andreas Koutsoudakis and Karen Canales-Reyes
Overview
Limited Liability Companies (LLCs) were originally allowed over twenty years ago by the New Jersey Uniform Limited Liability Company Act.[1] In 2012, the New Jersey Legislature adopted the Revised Uniform Limited Liability Company Act [RULLCA] – known as the Revised LLC Act – and the original Act was slowly phased out.[2] Most recently, the LLC has become a popular choice of entity due to its protection against personal liability for members and managers.[3] The LLC is a popular choice because it combines the best qualities of both corporations and partnerships. Like corporations, but unlike partnerships and sole proprietorships, owners – which are known as “members” in an LLC – are shielded from personal liability for most corporate debts.[4] Nonetheless, there are fiduciary duties that members and managers must be aware of when forming an LLC in New Jersey.
Like both shareholders of a corporation and partners of a partnership, members of an LLC can owe fiduciary duties both to the company itself and to their fellow owners.[5] What is a fiduciary? A fiduciary is one who is in a position of trust toward others, and therefore is held to a higher standard of care.[6] So, what is a fiduciary duty? A fiduciary duty is the duty owed by a fiduciary, and it is a higher duty and standard of care than that owed by those who are not fiduciaries. The fiduciary duties owed by members in an LLC are the duty of care and the duty of loyalty. These duties are defined by statute and case law, but they may be amended by agreement of the members by way of the LLC’s operating agreement.
Fiduciary Duties in a Limited Liability Company
The fiduciary duties owed by members in an LLC are the duty of care and the duty of loyalty. These duties are defined by statute and case law, but they may be amended by agreement of the members in the LLC’s operating agreement.
Duty of Care
Under New Jersey business law, the duty of care for members in an LLC is lesser than that for shareholders in a New Jersey corporation.[7] Under the Revised LLC Act, unless amended by the LLC operating agreement, members are liable for a lack of sufficient care only when their actions constitute “grossly negligent or reckless conduct, intentional misconduct, or willful violation of the law.”[8] Thus, while a member might be liable in some way under general negligence principles, he or she would not be liable for breach of their fiduciary duties for merely being negligent or careless.
Duty of Loyalty
Under the RULLCA, LLC managers also owe the LLC and its members a duty of loyalty. Under the duty of loyalty, a member or manager must account to the company for their actions.[9] The duty of loyalty demands that a member or manager hold as a trustee any property or profit gained in her actions as a member or her use of company assets for the company and its members. Furthermore, under the duty of loyalty, a member or manager must account to the LLC for any profits derived from:
- conducting the business of the LLC and dissolving the LLC;
- using the LLC’s property; and
- appropriating business opportunities of the LLC.[10]
Additionally, a member or manager must refrain from engaging in self-dealing and competing with the LLC. In New Jersey, whether the duty of loyalty applies to you depends on your status and role within the LLC. An LLC may be managed by its members or by one or more managers, and who manages the LLC determines who is bound by the duty of loyalty. Thus, the duty applies to the members of a member-managed LLC or to the managers (but not the members) of a manager-managed LLC.[11]
It is important to be wary of your duties as a member or manager of a New Jersey LLC. For more information on the topics covered here today, or for services related to your specific situation, contact our knowledgeable corporate governance attorneys at (646) 766-8308 or email info@kilegal.com to get the help you need.
[1] N.J.S.A. 42:2C-91(b).
[2] Id.
[3] https://www.sciencetimes.com/articles/26230/20200626/5-benefits-setting-up-llc-new-jersey.htm
[4] Id.
[5] N.J.S.A. 42:1A-24(b); N.J.S.A. 42:2A-3
[6] https://www.law.cornell.edu/wex/fiduciary_duty
[7] Id.
[8] Id.
[9] N.J.S.A. 42:2C-39(a
[10] N.J.S.A. 42:2C-11(f),
[11] Id.
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