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Duty of Loyalty Between LLC Cofounders

Los Angeles Tech Attorney Discusses Duty of loyalty between LLC Members, Representing Startup and Technology Businesses in Beverly Hills, Malibu, Venice, Santa Monica, and all across Southern California, Business Litigation Attorney, California

As entrepreneurs, trademark owners, tech startups, or local business owners know an LLC incorporation is exciting, but also a responsibility. All LLC cofounders may owe a fiduciary duty to the company. A fiduciary can be anyone from a trustee, executor, administrator, or personal representative. This means that all members are required to be trustworthy, act in good faith, and be honest. 

A fiduciary must put the success of and benefits to the LLC above individual gain. If your goal is to become a successful entrepreneur, the duty of loyalty between LLC members is crucial. Cofounder legal agreements and fiduciary duties are essential to avoid liability and allow for a smooth settlement if members do act selfishly. Experienced business owners know the value of startups hiring a professional and experienced attorney to advise and guide LLC Members. 

Fiduciary Duty

Whether you have a fiduciary duty will depend on the LLC’s management structure and whether you have management responsibilities. Examples of duty of loyalty may include but are not limited to account to the LLC for any LLC property that the member holds or refrain from competing with the LLC. If the LLC is a major acquisition, a fiduciary must take responsibility to assess the terms and advise the LLC about transactions that have strategic planning in good faith for the LLC. Working with an experienced attorney is necessary to navigate all the details involving fiduciary duties. The state law governing the LLC’s formation may include statutes and case law imposing fiduciary duties on members and managers. Some of these duties can be expanded, reduced, or excluded in some states while others do not allow modifications to duties by agreement. 

Trevor Milton, the founder of the electric truck company Nikola, has been charged with fraud. Milton is accused of misleading investors by inflating the company’s stock price on social media while receiving millions in personal benefits

A fiduciary duty is one of the most demanding obligations that exist under the law. A new startup may overlook the implications of not imposing a duty of loyalty among all LLC members. This neglect can cause long-term chaos. Oftentimes a new company is formed by close acquaintances who commit to loyalty verbally, but having the necessary documents processed through state law will prevent costly litigations when members of LLCs run into a conflict of interests. When a fiduciary fails to comply or take advantage of responsibilities. A breach may result in the LLC member’s suspension, removal, or surcharges. Worst-case scenario, they face criminal charges. When it comes to money damages, fiduciaries are ordered to pay compensatory damages, punitive damages, or double treble damages. 

Los Angeles Tech Attorney Discusses Duty of loyalty between LLC Members, Representing Startup and Technology Businesses in Beverly Hills, Malibu, Venice, Santa Monica, and all across Southern California, Business Litigation Attorney, California
Los Angeles Tech Attorney Discusses Duty of loyalty between LLC Members, Representing Startup and Technology Businesses in Beverly Hills, Malibu, Venice, Santa Monica, and all across Southern California, Business Litigation Attorney, California

Breach of Fiduciary Duty

In August 2019 Directors of Blue Bell Creameries USA, Inc. (“Blue Bell”) were sued for breach of fiduciary duty following a lethal listeria outbreak in its ice cream facilities. Directors had been aware of the possibility of this outbreak by company workers, yet they failed to place reasonable systems in place to monitor and report this important issue. In this case, Blue Bell Creameries USA, Inc. had agreed on fiduciary duties in place and therefore was favored and collected the appropriate evidence against directors and ensured a timely resolution. In other cases, resolving these breaches can be costly and time-consuming. 

A well-known fraud case is that Theranos CEO Elizabeth Holmes committed fraud by misrepresentation and misleading the effectiveness of the company’s medical technology while raising money from investors. In another case founder Trevor Milton of the electric truck company, Nikola, was charged with fraud for using his social media platforms to inflate his company’s stock price while not having a product to sell, which the company had claimed was ready for the market. 

Holmes is the CEO of Theranos, a medical company that misrepresented its technology while raising money from investors.

These are just some of the cases of breaches of fiduciary duty. Duty of loyalty between LLC Members’ agreements can not prevent members to commit breaches in the future, but it can prevent and deescalate the impact it can have. When it comes to LLCs, these obligations are complex and unique to each situation. 

Legal Protection

Our attorneys are experts in comprehensive reviews of your LLC operating agreement and the governing state law to help you understand any fiduciary duties you may owe to the LLC — and don’t worry; we’ll help you navigate those laws and duties. No matter how much research you do on Fiduciary Duties, only an experienced Fiduciary attorney knows the LLC landscape and can advise on equitable fair terms for cofounders’ agreements. 
Attaching and determining the duty of loyalty between LLC members is no easy task, letting a knowledgeable lawyer guide your company members though the process is in the best interest of all business owners and stockholders. All brand and business owners are well-advised to consult with an experienced marketing trademark attorney and intellectual property law firm in Los Angeles, New York, Atlanta, Miami, or Dallas, before launching into an LLC with multiple members.

David N. Sharifi, Esq.
David N. Sharifi, Esq.

David N. Sharifi, Esq. is a Los Angeles based intellectual property attorney and technology startup consultant with focuses in entertainment law, emerging technologies, trademark protection, and “the internet of things”. David was recognized as one of the Top 30 Most Influential Attorneys in Digital Media and E-Commerce Law by the Los Angeles Business Journal.
Office: Ph: 310-751-0181; david@latml.com.

Disclaimer: The content above is a discussion of legal issues and general information; it does not constitute legal advice and should not be used as such without seeking professional legal counsel. Reading the content above does not create an attorney-client relationship. All trademarks are the property of L.A. Tech & Media Law Firm or their respective owners. Copyright 2019. All rights reserved.

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