Corporate Duties & Responsibilities

The relationship between business partners (shareholders in corporations, members in limited liability companies) is just as important as the business itself. Disagreements about work hours, hiring family, friends and relatives, funding requirements and financial control and voting control are just a few things that can cause friction. Business partners who take the time to negotiate and document their relationships (through shareholders’ agreements or operating agreements) can resolve most differences and misunderstandings through the negotiating process.

With or without an agreement, there are certain duties and responsibilities business partners have to one another. Business partners generally owe each other duties of good faith, loyalty and care (fiduciary duties) meaning that a partner may not favor himself/herself/itself over any other partner or approve any company action in which the partner has a conflict of interest (hiring a relative or affiliate, raising compensation levels, approving expense reimbursements, etc.). Even without written non-competition agreements a business partner cannot divert company business or opportunities to himself/herself or any third party.

Fiduciary duties can change based on the financial condition of the company itself. When a company is solvent fiduciary duties and obligations run between the owners (as discussed above). If a company is insolvent (or during any period of insolvency) the fiduciary duties are owed to the creditors (private noteholders, banks, etc.) of the company.

Fiduciary duties also exist in the employer-employee relationship. Even without written restrictive covenants employees cannot take certain actions while employed. For example, if an employer learns that an employee planned and began to engage in a competing business while employed by the employer, that employee has likely breached a fiduciary duty to the company for which the company could take legal action and stop a competitor.

Gaining an understanding of the duties and obligations business owners have to each other and third parties will help prevent costly future disagreements between partners and costly litigation.