Do LLC Members and Managers Owe a Fiduciary Duty to the Company?

Throughout Arizona, and elsewhere in the United States, many entrepreneurs opt to register their new business as a limited liability company (LLC). This type of legal entity offers many advantages to owners, shielding them from personal liability while relieving them from the formal requirements associated with a corporation. However, the statutory framework that governs LLCs in the state is less than a decade old, so there is some confusion about the responsibility of members and managers within this business structure.

Under the Arizona Limited Liability Company Act (ALLCA), originally enacted in 2019, LLC members acting as agents generally owe fiduciary duties of loyalty and care to the business. This responsibility extends to managers as well where applicable. When forming an LLC however, members should always take care to draft a clear, comprehensive operating agreement. Should they choose to do so, members can agree to language limiting or eliminating common-law fiduciary duties. On the other hand, they may not waive the implied covenant of good faith and fair dealing, which is embedded in every contract

This approach to LLC fiduciary duties is exemplified by the In re Sky Harbor Hotel Properties case adjudicated by the Arizona Supreme Court in 2019. Decided before ALLCA took effect, the court granted LLC members more freedom than corporate officers to waive certain responsibilities. Creators of the LLC must be very deliberate about whether they want to take this step, as a court is unlikely to find that a waiver exists if the operating agreement is vague on the subject. 

You might also want to consider including terms relating to indemnification, conflicts of interest and exculpation for ordinary negligence in your operating agreement. A knowledgeable business formation attorney can draft a document suited to the circumstances and priorities of your business. Thoughtful drafting on the front end is the best defense against costly litigation later.

The Law Offices of Donald W. Hudspeth P.C. in Phoenix works with business owners to protect their interests during the formation process, and after their company launches. If you have questions about starting an LLC, or another type of legal entity, such as a corporation or partnership, please call 866-696-2033 or contact us online to make an appointment.