Fiduciary Duties in Partnerships

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Fiduciary Duties in Partnerships

In partnerships, each partner owes the other partners a fiduciary duty. This duty is a form of trust. Depending on the nature of the partnership and what was agreed on in your partnership agreement, the fiduciary duty owed may differ. Nonetheless, state statutory law governs the basic fiduciary duties. 

Who Owes a Fiduciary Duty?

Depending on the setup of the partnership, the person who owes this duty differs. In general and limited partnerships, each general partner and limited partner owes a duty of fiduciary duty. This is because in general and limited partnerships, any one who manages the partnerships has a direct impact on the best interests and goals of that partnership. And typically, both general and limited partners have management duties.

However, in limited partnerships, some limited partners merely contribute capital for the partnership’s formation. Thus, they do not have any “say” or management capabilities. And these limited partners leave all management duties to the general partners. For this situation, these limited partners do not owe a fiduciary duty. But if they start to have some sort of management control, the court will view them as general partners with fiduciary duties instead.

Fiduciary Duties

There are various types of fiduciary duties owed by partners.

Fiduciary Duty of Good Faith and Fair Dealing
The fiduciary duty of good faith and fair dealing means that the partners must act honestly and fairly in their dealings pertaining to the partnership. This includes all acts in reaching the partnership’s mission statement and goals, and includes daily operations. This duty starts at the partnership’s formation and ends at the partnership’s dissolution.

Fiduciary Duty of Loyalty
The fiduciary duty of loyalty means that the partners must place the partnership’s best interest above their own personal interest. And partners shall avoid conflicts of interest between the partnership and their personal dealings. In other words, partners may not act to harm the partnership’s goal for their own gain.

Fiduciary Duty of Care
The fiduciary duty of care is the duty to act prudently and competently towards all acts in managing the partnership. The standard is based on what a reasonable person in that role would do. Additionally, under the business judgment rule, if the partner acted under good faith and reasonable care, he will not be liable even if the act turns out unfavorably.

Fiduciary Duty of Disclosure
The fiduciary duty of disclosure is the duty to inform all material acts to other partners. They must tell other partners about the consequences of their acts, and the overall business health. Moreover, if their decision has a conflict of interest to it, then they must disclose this as well.

Consulting an Attorney

If you believe your business partner is breaching his fiduciary duty, then you should contact a business lawyer. The breaching partner will be personally liable for any harm that he has caused the partnership.

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Last Modified: 04-13-2015 02:25 PM PDT

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