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The Importance of Clear Agreements
The relationship between business partners—whether shareholders in a corporation or members in a limited liability company (LLC)—is fundamental to the success of the business. Disagreements about work hours, hiring practices, funding needs, financial control, and voting rights can create friction. By negotiating and documenting these relationships through shareholders’ agreements or operating agreements, many potential conflicts and misunderstandings can be resolved proactively.
Fiduciary Duties
Business partners have inherent fiduciary duties to each other, including:
- Good Faith: Partners must act with honesty and integrity.
- Loyalty: Partners should avoid self-dealing and conflicts of interest, such as favoring oneself over other partners or approving transactions that benefit themselves disproportionately.
- Care: Partners must make informed decisions and act in the best interest of the company.
Even in the absence of formal non-competition agreements, partners must not divert business opportunities or company assets for personal gain.
Duties During Solvency and Insolvency
Fiduciary duties shift based on the company’s financial status:
- Solvent Companies: Duties are owed primarily to other business partners.
- Insolvent Companies: Duties are redirected to the company’s creditors, including note holders and banks.
Employer-Employee Fiduciary Duties
Fiduciary responsibilities also apply to the employer-employee relationship. Employees who plan or engage in competing business activities while employed may breach their fiduciary duties, potentially leading to legal action by the employer.
Preventing Disputes and Litigation
Understanding and addressing these duties and obligations helps prevent costly disputes and litigation between partners. Proper documentation and clear agreements are essential for mitigating risks and ensuring smooth business operations.
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For expert guidance on corporate duties and responsibilities, get in touch with us to discuss how we can help protect your business relationships and prevent legal issues.