LLC Fiduciary Duties ClauseDuty of care, duty of loyalty, modification permitted by state, sample clause language
The Three Fiduciary Duties
The duty of care requires fiduciaries to act with the diligence and prudence of a reasonably careful person in similar circumstances. In LLCs the duty of care is typically the lowest-bar fiduciary duty; gross negligence is the usual standard for breach, and simple business mistakes do not breach the duty. A manager who carefully considers a decision, reviews relevant information, consults professionals where appropriate, and acts in what they reasonably believe to be the LLC's best interest has satisfied the duty of care, even if the decision turns out poorly.
The duty of loyalty requires fiduciaries to act in the best interests of the LLC, not in their personal interest. Specific obligations: do not compete with the LLC, do not usurp LLC business opportunities, do not engage in self-dealing transactions without disclosure and disinterested approval, do not misuse LLC assets or confidential information for personal gain, and disclose conflicts of interest. Loyalty is the most-litigated of the fiduciary duties because the boundary between personal and LLC interest is often fact-specific.
The duty of good faith (or the implied contractual covenant of good faith and fair dealing) exists in every state and cannot be eliminated, even in Delaware. It requires parties to act consistently with the reasonable expectations of other parties under the operating agreement. The duty is narrower than care or loyalty: it polices behaviour that, while not technically breaching a written term, undermines the spirit of the agreement.
Modification by State
| State | Modification Permitted |
|---|---|
| Delaware | Permits expansion, restriction, or elimination of fiduciary duties (6 Del. C. § 18-1101(c)); implied covenant of good faith cannot be waived |
| California | Default duty of care and duty of loyalty apply to managers; modification permitted but elimination unclear |
| New York | Default duties apply; can be modified by operating agreement under NY LLC Law § 417 but not eliminated entirely |
| Texas | Permits broad modification; nonwaivable items limited to good faith covenant and statutory protections |
| Florida | RULLCA approach: duty of care and loyalty default; modifications permitted but not elimination |
| RULLCA states (general) | Permit modification of duties subject to limitations; elimination generally not permitted |
Delaware's 6 Del. C. § 18-1101(c) is the most permissive provision. It explicitly states that the operating agreement may "expand, restrict, or eliminate" the default fiduciary duties of managers and members. The only exception is the implied covenant of good faith and fair dealing under § 18-1101(e), which cannot be waived. This is one of the principal reasons large private equity, joint venture, and sophisticated investor LLCs are formed in Delaware.
Default Restrictions Under Duty of Loyalty
| Conduct | Default Treatment |
|---|---|
| Competing with the LLC | Default: prohibited under duty of loyalty |
| Pursuing LLC business opportunities personally | Default: prohibited under corporate-opportunity doctrine |
| Self-dealing transactions (related-party deals) | Default: permitted with disclosure and disinterested approval |
| Using LLC assets for personal benefit | Default: prohibited |
| Disclosing LLC confidential information | Default: prohibited |
| Voting on matters affecting personal interest | Default: vote may be cast but the underlying transaction subject to fairness scrutiny |
Sample Fiduciary Duties Clauses
Five Fiduciary Duties Mistakes
Eliminating duties protects the manager but exposes minority members. Do this only with informed consent of all members and only in Delaware (where it is clearly permitted).
Even Delaware does not permit waiver of the implied covenant of good faith and fair dealing. Drafting that purports to waive everything is overreach and may invalidate the entire fiduciary modification.
'Manager may engage in transactions with the LLC' is too broad; 'Manager may not engage in any transaction with the LLC' is too restrictive. Specify the disclosure-plus-disinterested-approval procedure.
When members run multiple businesses, the corporate-opportunity doctrine creates ambiguity over which opportunities belong to which entity. Pre-agreed allocation reduces disputes.
California, New York, and most non-Delaware states permit only limited modification. Drafting that works in Delaware may be unenforceable elsewhere.
Indemnification →
Companion clause that funds the cost of fiduciary defense.
Delaware LLC OA →
Most permissive state for fiduciary duty modification.
Provisions Checklist →
All 25 standard LLC operating agreement clauses.
Dispute Resolution →
How fiduciary disputes get resolved.
Interactive Builder →
Generate an outline including fiduciary provisions.