Duties of general partners and LLC members

The Duty Map: Conduct That Triggers Loyalty, Care, and Good Faith

Fiduciary-duty problems for general partners and LLC participants turn on who owes the duty, what conduct occurred, and which statutory duty the conduct implicates. The consequence may be disgorgement of a benefit, an accounting, or other relief-not merely compensation for an enterprise loss.

For a general partner, RUPA §404 supplies the complete statutory set: the duty of loyalty, the duty of care, and the obligation of good faith and fair dealing. The loyalty duty is violated when the partner:

1. Accounts to the partnership and holds as trustee any property, profit, or benefit derived from conducting or winding up partnership business, using partnership property, or appropriating a partnership opportunity;
2. Deals with the partnership in conducting or winding up its business as, or on behalf of, an adverse party; or
3. Competes with the partnership in its business before dissolution.

The duty of care is narrower than ordinary negligence. During the partnership’s business or winding up, the partner must refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. A merely careless decision ordinarily is not a statutory breach of the fiduciary duty of care under RUPA §404, although a contract or another body of law may still matter.

Good faith and fair dealing applies when the partner discharges duties or exercises rights. It requires conduct consistent with the partnership relationship and the agreement’s legitimate allocation of authority. It does not make every self-interested act disloyal, guarantee equal outcomes, or replace the specific loyalty and care elements.

LLC analysis begins with management status. In a member-managed LLC, each member generally owes the company and the other members the loyalty and care duties stated in ULLCA §409. In a manager-managed LLC, a manager owes those duties to the company and the members. A nonmanager member does not owe fiduciary duties solely because of membership; if that member exercises a statutory or agreement-based right to participate in management, the duties apply to the extent of that participation.

The substantive LLC duties largely track the partnership rules. ULLCA §409 treats as loyalty violations the same three categories: taking company property, profits, or opportunities; adverse dealing with the company; and competing with the company before dissolution. The LLC care duty likewise requires more than ordinary negligence: gross negligence or recklessness, intentional misconduct, or a knowing violation of law. Good faith and fair dealing governs the discharge of duties and exercise of rights.

This is closed-book: commit the three loyalty categories and the three-part care threshold to memory before applying facts.

Near-Miss Rules: The Fact That Changes the Result

Opportunity versus ordinary competition. A partner or manager may have a personal business interest, but taking an opportunity learned through partnership or company business, or through enterprise property, triggers the loyalty rule. The enterprise need not already have signed a contract. A realistic opportunity connected to the enterprise’s business can be enough. By contrast, competition is separately prohibited only before dissolution under the enumerated loyalty rule. Thus, a partner who starts a competing business while the partnership is operating may breach loyalty even without taking a specific customer opportunity. After dissolution, the statutory competition prohibition no longer supplies that particular answer, though misuse of property, confidential information, or an agreement may create a different problem.

Self-interest versus adverse dealing. The statutes do not make every transaction involving an owner automatically disloyal. A partner may lend money to or transact with the partnership, and an LLC participant may have personal interests. The question is whether the person dealt with the enterprise as, or on behalf of, an adverse party, appropriated enterprise property or opportunity, or otherwise used the relationship to obtain a prohibited benefit. An undisclosed conflict is a warning fact, not a substitute for identifying the loyalty category.

Care versus loyalty. A partner who makes a bad investment through ordinary carelessness has not necessarily violated RUPA §404’s care duty. A manager who knowingly violates a safety law has crossed the care threshold even if no one proves an intent to harm the LLC. Conversely, secretly taking an LLC opportunity is a loyalty problem even if the decision was carefully planned and caused no immediately measurable loss.

Role versus title. In a manager-managed LLC, “member” alone is not the trigger for fiduciary duties under ULLCA §409. Ask whether the person is a manager or actually exercised management rights. A person can be a manager without being a member, and a member can become subject to the duties for the management activity actually undertaken.

Agreement modification. RUPA §103 and ULLCA §105 permit substantial private ordering but do not permit unlimited waiver. An agreement may identify particular activities that will not violate loyalty and may establish authorization or ratification procedures, but those provisions must not be manifestly unreasonable. The duty of loyalty cannot simply be eliminated. The duty of care may not be unreasonably reduced, and the agreement cannot eliminate good faith and fair dealing; it may prescribe standards for that obligation only if the standards are not manifestly unreasonable.

A valid approval provision matters only if its conditions are met. Look for the required vote, the required decision makers, and disclosure of material facts where the agreement or statute requires it. Do not treat an agreement saying “members may compete” as automatically decisive if the clause is so broad or unreasonable that it effectively eliminates loyalty.

Recurring errors include:

• Calling a partner’s ordinary negligence a statutory care breach when the facts show none of the RUPA §404 threshold conduct.

• Treating a passive member of a manager-managed LLC as a fiduciary merely because the person owns a membership interest.

• Missing a loyalty breach because the enterprise had no signed contract when the owner appropriated an opportunity arising from enterprise business.

• Assuming every self-interested transaction is forbidden instead of asking whether it is adverse dealing, misuse of enterprise property, or appropriation of an opportunity.

One Choice, One Decisive Duty: The Opportunity Hidden in the Facts

Atlas and Berry are the only general partners of a consulting partnership that is still operating.

The partnership prepared a proposal for a hospital after learning through its regular business contacts that the hospital needed consulting services.

Before the partnership submitted the proposal, Atlas secretly withdrew the opportunity, submitted a competing proposal through a business Atlas owned individually, and kept the resulting fee.

The partnership agreement contains no provision addressing outside opportunities.

Three Short Runs: What the Facts Test

High-Yield Points - ⚡ Biggest Takeaways

Test loyalty by identifying the enterprise property, benefit, opportunity, adverse dealing, or pre-dissolution competition. Ordinary negligence is below the statutory care threshold; gross negligence, recklessness, intentional misconduct, or knowing illegality is required. In a manager-managed LLC, membership alone does not create fiduciary duties; management status or actual participation does.