What Duties Do Business Partners Owe Each Other?

Jeffrey Ochrach, Your Business Attorney in Roseville, CA

I commonly see close friends form small businesses together.  They usually operate as a partnership or LLC.  Unfortunately, these business unions are much like marriages – they don’t always last.  When things go awry,

I often see one partner acting a little less honorably than one would hope.

What are the Duties of One Business Partner to Another?

Members of an LLC, partners in a general partnership, and majority shareholders in a corporation owe “fiduciary duties” to their counterparts.  I’ll call all of these types of business owners “partners,” since most business people think in those terms.  To honor her fiduciary duties, a partner must act in a way that furthers the best interest of the other partners.  She cannot put her own self-interest ahead of her partner’s interest.

For example, a partner may not cause the dissolution of her LLC with the goal of starting a new company on her own that continues the same business as the LLC.  As the California Supreme Court put it, “”When a partner wrongfully snatches a seed of opportunity from the granary of his firm, he cannot, thereafter, excuse himself from sharing with his copartners the fruits of its planting, even though the harvest occurs after they have terminated their association. . . .”  Leff v Gunter (1983) 33 Cal.3d. 508, 516.

The Golden Rule

A majority shareholder who loaned money to the corporation may not cause the corporation to default on the loan and then take the assets of the corporation for himself.  Likewise, a partner may not secretly engage the business in a transaction that benefits only that partner.  Nor may a majority of partners vote to pay themselves salaries or distributions that they do not share proportionately with their other partners – unless the discrepancies are in complete good faith and fairly represent disproportionate contributions of time or talent.

Follow the Golden Rule.  Treat your partners as you would want them to treat you.  If you don’t, be prepared for that lawsuit coming down the pike – the one you’re going to lose.