Fiduciary duties play a crucial role in both Limited Liability Partnerships (LLPs) and traditional partnerships, outlining the responsibilities partners and members owe to each other and the business. In this article, we delve into the nuanced realm of this duty, examining how its application differs between these two business structures.
What is a ‘fiduciary duty’?
Fiduciary duties encompass a set of obligations which partners and members owe to each other and to the business. The core duties include good faith, loyalty and care.
Fiduciary duties – LLPs vs partnerships
1. Good faith
In a partnership, each partner owes each of its fellow partners a duty of utmost good faith. In summary, this creates an overarching duty for the partners to make a conscious effort to think about their actions and the consequences that they will have to the partnership. Key to note, is that this duty exists not only once the partnership is formed, but also during the negotiations of it.
Unlike a partnership, an LLP has a separate legal personality from its members, meaning that typically those members do not automatically owe each other a duty of good faith. If a duty of good faith is to be exclusively or impliedly included, there is a risk that the personal liability of an individual member would be weakened as a result. This should be a point of consideration when negotiating the LLP agreement, as the members will need to consider whether explicit enforcement of this duty is necessary in their circumstances. Despite this risk, in practice, LLP members will typically still choose to extend this duty of good faith, in a bid to demonstrate the importance of a trusted relationship.
Traditional partnerships rely heavily on a duty of loyalty, mutual trust and collaboration. This requires partners to prioritise the interests of the partnerships over their own personal interests. Partners must act in good faith, providing full disclosure of information and avoiding conflicts of interest that may compromise the business.
Conversely, LLPs introduce an additional layer of complexity to this duty, due to the protection of limited personal liability. While the duty of loyalty remains, the impact of limited liability affects the dynamics of how this is practiced and may risk exposure of individual members for the reasons outlined above.
3. Care and skill
Finally, there is an obligation on partners to exercise reasonable care, diligence and skill in managing partnership affairs. This involves making informed decisions about the business and acting with prudence.
Similarly, in LLPs, reasonable care and skill must be exercised by the members throughout their course of conduct. This duty specifically extends to placing an obligation on members to ensure that they are managing the business without engaging in grossly negligent or reckless conduct. The limited liability feature of an LLP does not absolve members of their duty to act responsibly, emphasising the importance of diligent decision-making.
The key is in the details
Although both partnerships and LLPs demand a delicate balance between the individual interests of the partners and the collective well-being of the business, there are distinct differences on how the duty of good faith is applied between the two in practice.
Understanding the key distinctions in application of the fiduciary duties within partnerships compared to LLPs is essential, especially because the failure to uphold fiduciary duties can lead to legal consequences, including possible claims of breach of contract or even dissolution of the LLP or partnership.