In this article we explain the fiduciary duties of LLC members in Illinois. We answer the questions: “what is the difference between a manager-managed LLC and a member-managed LLC?” and “what duties do members of LLCs have to one another?” We explain the fiduciary duty of loyalty between LLC members and the fiduciary duty of care between LLC members.
For more on this topic, check out our article: What Rights Do LLC Members Have in Illinois?
First, let’s quickly review LLCs. An LLC is a legal entity that protects its members from personal liability for the debts or obligations of the LLC. In Illinois, similar to most other states, a limited liability company can be managed by its members or by other managers. A member-managed LLC means all of the members share in the management of the LLC. A manager-managed LLC means the members appoint someone (LLC member or non-member) to run the business.
All members of member-managed LLCs and managers of manager-managed LLCs have authority to bind the LLC to contracts, and they owe certain fiduciary duties to both the company and fellow members.
These duties of trust, otherwise known as fiduciary duties, ensure all members or managers of an LLC are promoting the interest of the LLC above their own. These duties include a duty of loyalty, a duty of care, a duty to refrain from competing with the company, and a duty to act fairly in dealing with the company. Members should seek advice from an attorney if they have questions or concerns about these actions.
Members are obligated to make required capital contributions based on the terms of their operating agreement. A member who votes for an unlawful distribution is personally liable to the LLC for the portion of the distribution that exceeds the maximum amount that could have been lawfully distributed.
A member in a member-managed LLC may be held liable for breaching any fiduciary duties. Non-managerial members of manager-managed LLCs, however, owe no such duties just by virtue being members of the LLC.
If a member of an Illinois manager-managed LLC acts in a managerial nature, even if he or she is not listed as a manager in the company’s operating agreement, he or she can be held responsible for the statutory fiduciary duties of a manager. Therefore, members of Illinois manager-managed LLCs need to be careful when participating in decisions regarding the company’s policies, products, employees or business.
The duty of loyalty obligates each member or manager of the LLC to put the success of and benefits to the LLC above any personal or individual advantages. This means acting honestly, avoiding conflicts of interest, and not taking secret advantage of any LLC business opportunities. In some cases, you may be allowed to receive a personal benefit from LLC deals, as long as you’ve given full-disclosure prior to the deal and received approval from the LLC.
The duty of care obligates each member of manager of the LLC to act in good faith and exercise reasonable care in executing the activities of the LLC. For example, if your LLC is considering a new business venture, you are obligated to act responsibly and reasonably in advising the LLC about the potential opportunity. If anything were to go sour with the LLC, you’re typically not liable for business decisions made in good faith and with reasonable care. This is known as the Business Judgment Rule.