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Basic Standards of Conduct for Partners in a Partnership and Members of an LLC

Posted on: April 10th, 2015
Statutorily Imposed Duties. State statutes provide that individuals associated with partnerships shall discharge his or her duties in good faith, with the care an ordinarily prudent person in the like position would exercise under similar circumstances and in a manner he or she reasonably believes to be in the best interests of the partnership. How well they perform their functions is measured largely by fiduciary law; specifically by what is commonly known of as a “duty of care.” In performing your functions, you may be subjected to personal liability for a breach of the duty of care. You may be found to have breached the duty of care if you fail to act: (i) in good faith; or (ii) in honest belief that an action taken was in the best interest of the partnership.

 

  • Meaning of Good Faith Requirement. The “good faith” standard has been generally understood to require that you: (i) not have a conflict of interest; (ii) act honestly; and (iii) not approve (or condone) illegal activity. The “best interests” requirement specifies that actions must be related to the furthering of the partnership’s interests. The “informed basis” requirement imposes a duty of oversight, inquiry, and diligence; meaning that you must exercise the care that a prudent person would exercise in the management of his or her own affairs. Generally, you will not incur personal liability for making a wrong judgment; however, you may incur liability for making a careless, wrong judgment. Regular involvement of legal counsel and/or the partnership’s accountants will provide additional protection from personal liability.

  • “Self-Dealing”; Duty of Loyalty. Your loyalty to the partnership is most tested when you operate on both sides of a transaction (where you have both a personal or financial interest in the transaction and are associated with the partnership). Such “self-dealing,” or “conflict of interest” transactions are tolerated only after full disclosure by the affected person and approval of the transaction by the partnership following full disclosure, and then only if the transaction is “fair” to the partnership. Self-dealing transactions are permissible under these circumstances because business opportunities are frequently made possible through such transactions. An example would be a loan from one of you to a partnership to enable it to purchase property and gain a business opportunity it would otherwise be unable to obtain.

  • “Corporate Opportunities” and Unfair Competition. The duty to loyally put the interests of the partnership ahead of your own personal interests applies not only to your dealings with the partnership, but also to outside business dealings that affect the partnership. Harm to partner expectations is just as real when you take away a profitable business opportunity from the partnership or set up a competing business (as when one engages in unfair self-dealing). Flatly stated, you may not usurp corporate opportunities for your own benefit or compete with the partnership in any manner unless the partnership consents.

Disclaimer Notice: It is my intention that the comments, articles, and other information provided on this website are intended to provide you with general information which may be interesting and of value to you. You should not construe any of this information as legal advice or my opinion as it may relate to your specific circumstances. Please feel free to contact me directly if you would like to discuss your own situation and your estate, real property, or business planning needs.

 

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Leonard A. Hagen, J.D., LL.M.
Sound Estate Planning, PLLC
152 3rd Ave. South, Ste. 107
Edmonds, WA 98020
Phone: (425) 967-7287
len@soundestateplanning.com

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