As a business owner in New York, entering a partnership means more than just agreeing to work together - it also means taking on important legal responsibilities known as fiduciary duties. These duties require partners to always act in the best interests of the business and each other. Failing to meet your fiduciary obligations can lead to messy and expensive legal battles that can threaten the very survival of your company.
It's important for every business owner to fully grasp what their fiduciary duties involve and how to properly fulfill them. Consulting with our experienced New York business litigation attorneys can help ensure you're meeting your legal obligations and protecting your partnership from potential disputes – and protecting your rights if your co-owner or partner is violating his or her obligations. Let's dive into the key fiduciary duties in business partnerships.
The Duty of Loyalty
The duty of loyalty is one of the most important fiduciary responsibilities. This means always putting the interests of the business ahead of your own personal gain. You can't take opportunities for yourself that could benefit the partnership or business, like poaching a major client for a side venture (that is called usurping business opportunities). Any business deals you make need to be for the good of the company, not just your own bank account.
Partners also have a duty not to compete with the business. So, if your New York LLC focuses on healthcare clients, you can't freelance on the side for a competitor targeting the same market. Your professional efforts must be dedicated to the success of the shared business. Surprisingly, New York Limited Liability Company Law (LLCL) does allow LLC Members (owners) to disavow this duty, meaning that a business owner can compete against the business. But wise owners do not permit this exception.
If you're unsure whether an action might breach your duty of loyalty, ask yourself: Is this in the best interest of the business? Would I want my business partners doing this? When in doubt, avoid any potential conflicts of interest and consult with our knowledgeable New York business litigation and fiduciary duty attorneys.
The Duty of Care
As a business partner or co-owner, you have a duty to manage the company carefully and make sound decisions. This is known as the duty of care. You must handle business matters with the same prudence and diligence that a reasonable person would use under similar circumstances.
Meeting your duty of care means staying actively involved in the business and carefully monitoring financial matters, among other things. You should diligently review contracts, maintain good records, and thoroughly research major decisions. Making reckless choices or taking shortcuts could make you liable for any negative consequences.
This doesn't mean every decision has to be perfect or always lead to positive outcomes. Business entails inherent risks. What matters is exercising good judgment and making decisions based on the best information available to you at the time. Documenting your decision-making process can help show that you upheld your duty of care.
The Duty to Disclose
Openness and honesty are vital for successful business partnerships. Partners have a duty to disclose important information to each other. This includes any key facts or developments that could affect the company, such as a major change in the market, a serious legal issue, confidential personnel issues that could affect the business, or possibly an issue affecting one of the owners.
You must also be transparent about any conflicts of interest that arise, like an outside business venture that might compete with the business. Keeping your partners in the dark about significant matters can be a breach of your fiduciary duty and damage the trust that's so essential for a strong working relationship.
At the same time, the duty to disclose doesn't require sharing every minor detail. The key is to provide information that a reasonable business partner would find important for making effective decisions and providing oversight. Keeping the lines of communication open allows you to work together to tackle challenges and seize opportunities.
The Duty of Good Faith and Fair Dealing
Business partners rely on each other to act with honesty and integrity. As a partner, you have a duty to deal with your colleagues fairly and in good faith. This means keeping your promises, communicating truthfully, and engaging in ethical business practices.
Even if your partnership or shareholder agreement or LLC operating agreement doesn't expressly prohibit an action, it could still be a breach of fiduciary duty if it violates basic principles of fairness and loyalty. For example, agreeing to refer a certain percentage of clients to your partner, but then keeping all of the best leads for yourself could constitute bad faith dealing.
When each partner operates with transparency and treats each other fairly, it cultivates trust and mutual respect. This positive dynamic is more likely to drive long-term success than a cutthroat culture of secrecy and self-interest.
Preventing Conflict Through Clarity
One of the most effective ways to avoid breaching your fiduciary duties is to set clear expectations and foster open communication from the very beginning of your partnership. Your partnership agreement should clearly define each partner's responsibilities, how business opportunities will be pursued, and what actions require unanimous approval.
Having a written conflict-of-interest policy that requires disclosing outside business activities and outlines a process for addressing potential conflicts is also wise. Agreeing to a clear protocol upfront helps prevent misunderstandings and resolve issues before they escalate into serious legal disputes.
Of course, even the best planning can't prevent every problem. Partnership conflicts can arise for many reasons, from differing visions to clashing personalities. If you find yourself in a dispute over a potential breach of fiduciary duty, it's wise to get guidance from our skilled New York business litigation lawyers right away.
The Dangers of Breaching Your Duties
Failing to uphold your duties as a business partner or co-owner can have severe repercussions. If your actions damage the business, your partners may take legal action against you. A breach of fiduciary duty lawsuit can seek monetary damages, injunctions restricting certain activities, or even a court order dissolving the partnership.
Aside from the legal consequences, breaching your fiduciary obligations will almost certainly shatter the trust and collaboration that a thriving business needs. When partners feel betrayed or exploited, the damage can be impossible to repair. Your professional reputation may also suffer as word spreads about your misconduct.
In contrast, consistently fulfilling your duties with care and integrity builds a foundation for a successful, enduring partnership. Demonstrating that you take your responsibilities seriously fosters the trust and confidence of your colleagues and strengthens the business. Investing in your fiduciary role is investing in the company’s long-term stability.
Reach Out to Our Skilled New York Business Litigation Lawyers
Fiduciary duties form the legal foundation of business partnerships, reflecting the deep trust partners place in each other. As a New York business owner, you have a responsibility to act loyally, carefully, honestly, and fairly in all your company dealings. Living up to these duties requires diligence, openness, and a commitment to always put the partnership first.
No one starts a business partnership anticipating problems, but conflicts can emerge even between or among close friends or family members. Thoroughly understanding your fiduciary obligations - and having our experienced New York business litigation attorneys to advise you - positions you to prevent disputes and productively resolve any issues that arise.
Ultimately, upholding your fiduciary duties is about more than staying out of legal hot water. It's about preserving the trust, integrity, and common purpose that empowers a partnership to succeed. When you embrace your fiduciary role, you invest in your business's long-term prosperity and the realization of the entrepreneurial dream you pursued together.
If you have questions about your duties as a partner or need guidance on addressing a potential breach of fiduciary duty, or about business divorce because of a co-owners breach of a fiduciary duty, then don't hesitate to reach out to our skilled New York business litigation lawyers. With the right legal counsel, you can protect your business, your partnerships, and your future.
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This post is not intended as legal advice, but rather for educational purposes.