The fiduciary duties of LLC members and managers come down to two core obligations — loyalty and care — plus a separate contractual duty of good faith and fair dealing. Under the Revised Uniform Limited Liability Company Act (RULLCA), which many states have adopted in some form, these standards govern how anyone with control over the company makes decisions, handles its money, and deals with conflicts of interest. Who owes them depends on how the LLC is managed, and how far the operating agreement can bend them depends on rules the act polices closely.
The Duty of Loyalty
Loyalty is the most demanding of the obligations. It requires anyone in control of the LLC to put the company’s interests ahead of their own. RULLCA § 409(b) breaks the duty into three prohibitions: you cannot use company property or your position for personal benefit at the LLC’s expense, you cannot take the other side of a transaction with the company, and you cannot compete with the company while you are still involved in running it.
Self-dealing generates most loyalty disputes. If a manager learns of a business opportunity through their role — say, a chance to buy real estate the LLC would want — the opportunity has to go to the company first. Taking it personally is what courts call appropriation of a limited liability company opportunity, and it triggers liability whether or not the manager believed the LLC would have passed. The same reasoning covers using company funds, equipment, or other assets for personal purposes.
The bar on competition runs until the company dissolves. A manager who quietly starts a side business in the same industry while still running the LLC has breached loyalty even if the side business isn’t taking clients away. Courts look at whether the activity falls within the scope of what the LLC does, not whether it caused immediate measurable harm.
The Duty of Care
The duty of care sets the standard for how carefully members and managers must make decisions. Under RULLCA § 409(c), that standard is ordinary care: acting the way a reasonable person in a similar position would act under similar circumstances, and reasonably believing the decisions serve the company’s best interests.
The business judgment rule sits on top of this. RULLCA explicitly subjects the duty of care to it, which means a court will not second-guess a business decision just because it turned out badly. As long as the decision was made in good faith, on a reasonably informed basis, and without a personal conflict, the person who made it is protected. Liability under the duty of care usually requires something worse than a bad call: approving major expenditures without reviewing financial reports, ignoring obvious warnings from advisors, or deciding without any real investigation.
The earlier Uniform LLC Act set the bar at gross negligence. The revised act raised it to ordinary care, and pairing that with business judgment rule protection is meant to keep managers attentive without exposing them to hindsight lawsuits over every unsuccessful venture.
Good Faith and Fair Dealing
Good faith and fair dealing often gets grouped with loyalty and care, but RULLCA draws a sharp line: it is a contractual obligation, not a fiduciary duty. The act’s commentary states the obligation “does not command altruism or self-abnegation, and does not prevent a member from acting in the member’s own self-interest.”
What it does require is honesty and adherence to reasonable commercial standards when exercising rights under the operating agreement or the act. You cannot exploit technicalities to gain advantages the other members never anticipated. If the agreement gives you discretion over distributions, you cannot use that discretion to starve out a minority member while enriching yourself, even if nothing in the literal text forbids it.
The classification matters. Because good faith and fair dealing is contractual rather than fiduciary, it cannot be eliminated by agreement the way some fiduciary duties can. It functions as a floor beneath whatever else the members negotiate.
Who Owes These Duties
Which people inside the LLC actually carry these obligations depends on the management structure the members chose when they organized.
Member-Managed LLCs
In a member-managed LLC, every member owes loyalty and care to the company and to the other members. When all members have a hand in running the business, all of them are accountable for how they use that authority. Even a member with a small ownership stake owes these duties if they participate in management decisions.
Manager-Managed LLCs
In a manager-managed LLC, the fiduciary duties shift to the managers, whether they are members designated for the role or outside professionals hired to run the company. Non-managing members generally do not owe fiduciary duties because they do not control the company’s direction. Courts focus on actual authority rather than titles. If a non-managing member starts exercising real influence over business decisions, a court may hold them to fiduciary standards regardless of what the operating agreement calls them.
Controlling Members
A majority or controlling member who uses their voting power to direct the company’s actions may owe heightened obligations to minority members, even in a manager-managed structure. Controlling members can effectively dictate outcomes in ways that disadvantage smaller stakeholders: approving self-interested transactions, diluting minority interests, or blocking distributions. The duty of loyalty prohibits using the prerogatives of control to advance one group’s interests at another’s expense. Minority members in closely held LLCs are especially exposed because there is no public market where they can simply sell their interests and leave.
Changing the Duties in the Operating Agreement
One of the most useful features of LLC law is the ability to customize fiduciary obligations by contract. RULLCA allows significant modifications but sets hard limits so agreements cannot gut the protections entirely.
Under RULLCA § 105(d)(3), the operating agreement may alter or even eliminate aspects of the duty of loyalty, identify specific categories of activities that do not violate it, and alter the duty of care. These modifications are subject to a “manifestly unreasonable” standard. A court evaluates the provision based on the circumstances that existed when the members agreed to it, and will strike it down only if its objective or its means are readily apparent as unreasonable in light of the company’s purposes and activities.
The outer limits are firmer. No provision can authorize bad faith, willful misconduct, or a knowing violation of law. The contractual obligation of good faith and fair dealing cannot be eliminated. Even a heavily modified operating agreement has to preserve a baseline of honest conduct.
Safe Harbors for Conflict Transactions
Many operating agreements include safe harbor provisions setting out how a manager can engage in a transaction where they have a personal interest. The typical structure requires full disclosure of the material facts about the conflict, followed by approval from disinterested members or managers. If the manager follows the specified disclosure and approval process, the transaction is presumed valid and will not support a breach claim. Some agreements go further and replace fiduciary duties altogether with a contractual good faith standard, paired with detailed procedures that create a conclusive presumption of good faith for conflict transactions. Getting these provisions right in drafting is far cheaper than litigating a breach claim later.
Enforcing the Duties
When people running an LLC breach their duties, the company is the party being harmed. But those same people are not going to sue themselves. Derivative actions solve that problem by letting an individual member sue on behalf of the LLC to enforce the company’s rights.
Under RULLCA § 902, a member who wants to file a derivative action must first demand that the other members (in a member-managed LLC) or the managers (in a manager-managed LLC) cause the company to bring the action itself. If they refuse to act within a reasonable time, or if the demand would be futile because the people who would have to act are the same people who committed the breach, the member can proceed to court.
Standing rules are strict. Under RULLCA § 903, you must be a member when the action is filed and remain one throughout the litigation. The company may also form a special litigation committee of disinterested, independent persons to investigate the claims. That committee can recommend dismissal, but a court will follow the recommendation only if it finds the committee acted in good faith with reasonable care.
Remedies for a Breach
Courts have broad flexibility in fashioning relief, and what is available depends on the nature of the breach.
- Disgorgement. A manager who profits from a breach — by taking a company opportunity or self-dealing — must surrender those profits to the LLC, even if the company suffered no direct loss.
- Compensatory damages. When the breach causes financial harm, the breaching party owes the LLC the amount of the loss, covering lost business and wasted expenditures alike.
- Rescission. Courts can unwind transactions that resulted from a breach, returning the parties to where they stood before the deal.
- Injunctive relief. A court can order the breaching party to stop competing with the company, halt a conflicted transaction, or take specific corrective action.
- Removal. Managers who breach their duties can be removed from their positions, which is often the most important practical remedy in a closely held LLC where the parties still have to work together.
Time limits for breach of fiduciary duty claims vary by state, but the window generally runs two to five years from the date of the breach or its discovery. Missing the deadline forfeits the right to sue no matter how strong the underlying claim.
When a Breach Reaches Personal Assets
LLC members normally have limited liability, meaning their personal assets are protected from business debts. Fiduciary breaches can undermine that protection in two ways.
First, a breach is itself a basis for personal liability. A manager who violates loyalty or care can be held personally responsible for the damages their conduct caused. The LLC’s liability shield does not protect anyone from claims arising out of their own wrongdoing.
Second, patterns of fiduciary abuse can support piercing the veil, making members personally liable for the company’s debts to outside creditors. Courts look at whether the members respected the LLC as a separate entity. Commingling personal and business funds, using company assets personally, undercapitalizing the business, and failing to maintain basic organizational records all serve as evidence that the LLC was never really operating as an independent entity. Veil piercing generally requires more than sloppy bookkeeping. The creditor usually has to show that the members used the entity to perpetrate a fraud or accomplish some other wrongful purpose.
D&O Insurance
Directors and officers insurance is available for LLC managers and can cover legal fees, settlements, and judgments arising from breach-of-duty claims. These policies typically exclude criminal conduct, fraud, and transactions designed to benefit the insured personally at the company’s expense. An LLC whose managers exercise significant discretionary authority, especially over finances or related-party transactions, should treat D&O coverage as a serious consideration rather than an afterthought.