Limited Liability Company Laws

Recently, while representing a client in a lawsuit between members of a limited liability company (LLC), we realized there is potentially a gaping hole in Arizona law with respect to member relationships of a LLC.   One of the plaintiff’s claimed that the other members owed him a fiduciary duty and that the other members breached that fiduciary duty. A fiduciary duty is a duty to act for someone else’s benefit, while subordinating one’s personal interest to that of the other.  It is the highest standard of duty implied by law. Fiduciary duties typically fall into three categories: duty of care; loyalty and duty to disclose. The duty to disclose includes a duty to disclose any material matter. Initially, while you might presume that Arizona had established law that recognized these fiduciary duties, unlike other states that do explicitly recognize these duties, there is nothing in the Arizona statutes that adopts these duties. In the Uniform Limited Liability Company Act used as a model for most state LLC laws, there is a specific statute that outlines what the fiduciary duties are between members of a limited liability company. But, for some reason, Arizona did not adopt that section of the uniform act. One could interpret this to mean that the legislature intended for members of an LLC to spell out what their duties were to each other in their operating agreement. Unfortunately, there is not one citable published opinion from Arizona courts that recognizes fiduciary duties between members of LLCs. What this means for business owners who have multi-member LLCs is that it is extremely important to have a well-drafted operating agreement that outlines the members fiduciary duties to each other in writing or makes an informed choice not to spell those out. If you are a member of an LLC or thinking about starting one we can either draft or review your operating agreement to make sure that these fiduciary duties and other important provisions are included. I am happy to consult with you to chart the best course of action for all of your business legal needs. After all, Our Business is Your Peace of Mind^®.

Written by Attorney John Lohr, Jr., jll@hgplaw.com

The information contained herein is general information not legal advice. E-mailing attorneys from this website does NOT establish an attorney/client relationship. A formal attorney/client relationship begins after a conflicts check and engagement agreement are signed.