What duties do business partners and LLC managers owe each other in New York?

This page explains New York law for partnerships, limited liability companies and corporations formed in New York: who owes duties to whom, what those duties require, how conflicted deals are treated, and what a co-owner can do about a breach. KOR Law LLP's business divorce and internal dispute practice handles breach of fiduciary duty claims against managing members, officers, directors and controlling shareholders, along with partnership disputes and contested exits. The duties differ by entity, so the first question is always what kind of business you own together and what your written agreement says.

Who owes the duties, and to whom?

The statutes put the duty on the people who run the business, and the rules shift with the entity:

• General partners. Every partner must account to the partnership for any benefit, and hold as trustee for it any profits taken without the other partners' consent from a transaction connected with the formation, conduct or liquidation of the partnership, or from using its property (Partnership Law 43(1)). Partners must also give each other, on demand, "true and full information of all things affecting the partnership" (Partnership Law 42).
• LLC managers. A manager must act "in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances" (LLC Law 409(a)).
• Members who manage an LLC. Unless the articles of organization provide for managers, management is vested in the members, and a member exercising management powers is treated as a manager and carries a manager's duties and liabilities (LLC Law 401).
• Corporate directors and officers. Directors and officers must perform their duties in good faith and with the care of an ordinarily prudent person in a like position (BCL 717(a); BCL 715(h)).

The Court of Appeals has described the relationship in trust terms. In Tzolis v Wolff (2008), the court traced the derivative suit back to the principle that those in control of a business are like trustees, and said that when "fiduciaries are faithless to their trust, the victims must not be left wholly without a remedy." If the conduct you are worried about is still unfolding, the warning signs that a partnership or LLC dispute is headed to court walks through the early stages.

How is a fiduciary claim built, step by step?

1. Identify the entity and the role. Was the wrongdoer a general partner, a managing member, a manager, a director or an officer? Each has its own statute (Partnership Law 40 to 44; LLC Law 401, 409; BCL 715, 717).
2. Read the governing agreement. The partnership agreement, operating agreement or bylaws may allow conduct that would otherwise be a conflict. In Pappas v Tzolis (2012), the operating agreement let any member "engage in business ventures and investments of any nature whatsoever, whether or not in competition with the LLC."
3. Get the records. Partners have a right to inspect and copy the books and to receive information on demand; LLC members and shareholders have statutory records rights as well. The details are in how to get access to company books and records in New York.
4. Decide whether the harm was to the company or to you. If the business lost money, the claim usually belongs to the business and is brought derivatively. If you were harmed personally, a direct claim may fit.
5. Choose the remedy. Money, an accounting, rescission of a deal, an injunction or a court-supervised exit each lead to a different procedure and, sometimes, a different filing deadline.
6. Check the clock and the forum. The deadline depends on the remedy sought (IDT Corp. v Morgan Stanley, 2009), and many of these cases go to the Commercial Division of the Supreme Court.

What happens when a manager or director has a conflict?

A deal between the company and one of its managers or directors, or with another business in which that person has a substantial financial interest, is not automatically void. The statutes give it a safe harbor if the material facts of the interest were disclosed in good faith or known, and the deal was approved by the disinterested managers or directors, or by the members or shareholders entitled to vote (LLC Law 411(a); BCL 713(a)).

Without that disclosure and approval, the company may avoid the deal unless the people who benefit "establish affirmatively" that it was fair and reasonable to the company when it was approved (LLC Law 411(b); BCL 713(b)). The burden of proving fairness falls on the insider, not the complaining owner. The operating agreement or certificate of incorporation may add stricter limits and declare violations void or voidable (LLC Law 411(d); BCL 713(d)).

For corporations, BCL 720 lets an action be brought to make a director or officer account for neglect of duty or for the loss or waste of corporate assets, to set aside an unlawful transfer of assets where the recipient knew it was unlawful, and to stop a proposed unlawful transfer (BCL 720(a)). If a co-owner is about to move money or property out of the business, how fast you can get a TRO or preliminary injunction in a New York business dispute explains the emergency route.

Can the duties be limited or released?

Within limits, yes. Partnership Law 40 makes the partners' rights and duties "subject to any agreement between them," and the LLC and corporate conflict rules allow the governing documents to add restrictions (LLC Law 411(d); BCL 713(d)). An LLC may also indemnify members and managers, but not where a final adjudication establishes bad faith or active and deliberate dishonesty material to the claim, or that the person gained a financial profit to which they were not legally entitled (LLC Law 420).

Releases signed at the end of a relationship can also cut off claims. In Pappas v Tzolis, members who sold their interests to a co-member signed a certificate saying the buyer had no fiduciary duty to them in the sale and that they were not relying on his statements. The Court of Appeals held the release valid because the sellers were sophisticated, represented by counsel, and in a relationship that was no longer one of trust. The court described the test as "whether, given the nature of the parties' relationship at the time of the release, the principal is aware of information about the fiduciary that would make reliance on the fiduciary unreasonable." Anyone negotiating a buyout should read any release language with that decision in mind, and the valuation side of an exit is covered in how a business is valued in a New York buyout or dissolution.

What changes the answer?

• The kind of entity. Partners, LLC managers and corporate fiduciaries are governed by different statutes (Partnership Law 43; LLC Law 409; BCL 715, 717).
• Who manages an LLC. In a member-managed LLC, a member who exercises management powers carries a manager's duties (LLC Law 401(b)).
• The agreement's terms. Partnership duties are subject to the partners' agreement (Partnership Law 40), and an operating agreement can permit competing ventures, as the one in Pappas v Tzolis did.
• Disclosure and approval. Proper disclosure and disinterested approval protect a conflicted deal; without them the insider must prove fairness (LLC Law 411; BCL 713).
• Reliance on advisers. Managers and directors may rely in good faith on officers, counsel, accountants and committees, but not when they know facts that make the reliance unwarranted (LLC Law 409(b); BCL 717(a)).
• The remedy sought. A purely monetary claim generally carries a three-year limitations period, an equitable claim six years, and a claim where fraud is essential six years (IDT Corp. v Morgan Stanley, citing CPLR 214(4), 213(1) and 213(8)). See how long you have to sue for breach of contract, fraud, or a sale of goods in New York.
• A signed release. A knowing release by a sophisticated party in a relationship no longer based on trust can bar the claim (Pappas v Tzolis).

For example: a managing member who leases the building to his own company

Common mistakes

• Suing in your own name for the company's loss. Losses to the business are usually recovered derivatively; when a shareholder or member can sue on the company's behalf covers the requirements.
• Ignoring the agreement. A clause permitting competition or setting approval rules can decide the case (Partnership Law 40; Pappas v Tzolis).
• Signing a release too early. A buyout certificate disclaiming reliance and fiduciary duties can end the claim (Pappas v Tzolis).
• Waiting on a money claim. A three-year period may apply if only damages are sought (IDT Corp. v Morgan Stanley).
• Confusing fraud with breach of duty. Fraud has its own elements, explained in what you have to prove to win a fraud claim in a New York business case.
• Assuming disclosure cures everything. The conflicted insider's own vote cannot be the deciding vote under the safe harbor (LLC Law 411(b); BCL 713(a)).

What to do this week

1. Collect the partnership agreement, operating agreement or bylaws and every amendment.
2. List each transaction you suspect, with dates, amounts and who benefited.
3. Send a written records and information request under the statute that fits your entity.
4. Preserve emails, texts and bank records; do not take company documents you have no right to.
5. Check whether you have signed any release, estoppel or no-reliance certificate.
6. Speak with counsel about whether the claim is direct or derivative, and about deadlines.

If the relationship cannot continue, shareholders of a corporation can start with whether a minority shareholder can force a buyout or dissolution in New York. LLC members facing a standstill can read how to dissolve a New York LLC when the members cannot agree.

Frequently asked questions

Do LLC members who do not manage owe fiduciary duties?

The LLC Law places the statutory duty of good faith and care on managers, and on members only when they exercise management powers in a member-managed company (LLC Law 401(b), 409). Whether a passive member owes any duty depends on the operating agreement and the facts of the relationship.

Is a bad business decision a breach of duty?

Not by itself. The statutes ask whether the manager or director acted in good faith and with the care an ordinarily prudent person would use in a like position, and they protect good faith reliance on reports from officers, counsel and accountants (LLC Law 409; BCL 717(a)).

What is an "accounting" between partners?

It is a formal account of partnership affairs. A partner has a right to one if wrongfully excluded from the business or its property, if an agreement provides for it, under the fiduciary rule in Partnership Law 43, or whenever other circumstances make it just and reasonable (Partnership Law 44).

Can the company recover profits a manager made on the side?

For partners, the statute requires profits from partnership business taken without consent to be held as trustee for the partnership (Partnership Law 43). For LLCs and corporations, an undisclosed conflicted transaction can be avoided unless proved fair (LLC Law 411; BCL 713), and other remedies depend on the facts.

Where are these cases heard?

Usually in the Supreme Court in the county where the case is filed. Shareholder derivative actions and dissolution cases can be heard in the Commercial Division whatever the amount at stake; see whether your business dispute belongs in the New York Commercial Division.

Does a divorce change the duties of co-owners?

No, the business statutes still govern the co-owners' duties to each other. A divorce raises a separate question about how a spouse's ownership interest is treated, covered in how a family business is divided in a New York divorce.