When Does an LLC Manager Owe Fiduciary Duties to Members?

In a Florida limited liability company, an LLC manager owes fiduciary duties of loyalty and care when the company is manager-managed, and those duties run to both the company and its members. In a member-managed company, each member owes those duties instead. Whether a duty exists turns on the company’s management structure and on what the operating agreement changed; whether the manager personally pays money damages for a breach turns on a separate set of statutory categories.

Does Every LLC Manager Owe Fiduciary Duties?

No. Florida law assigns the duties by management structure, not by job title. Under section 605.04091, each manager of a manager-managed LLC, and each member of a member-managed LLC, owes fiduciary duties of loyalty and care to the company and its members.

See our overview of manager-managed vs. member-managed LLCs.

How Do You Know Whether Your LLC Is Manager-Managed?

Check the articles of organization and the operating agreement. Under section 605.0407, an LLC is member-managed unless one of those documents expressly provides for management by managers, or uses words of similar import.

Watch for this trap:

• Calling someone the “managing member” does not, by itself, make the company manager-managed, unless the context of the documents requires otherwise.
• If the documents never vest management in managers, the company is member-managed, and each member owes the duties.
• See how Florida courts interpret an ambiguous LLC operating agreement.

What About Members Who Do Not Manage?

Section 605.04091 does not list members of a manager-managed company among the people who owe these duties. A passive investor in a manager-managed LLC generally stands on the receiving end of the duties. Two cautions apply: a member given management functions under the operating agreement may be treated as a manager, and a member who knowingly receives an improper distribution can be liable to the company.

What Duties Does an LLC Manager Owe?

An LLC manager owes a duty of loyalty, a duty of care, and an obligation of good faith and fair dealing. Each is defined by statute, and an operating agreement can change some of them only within limits.

The Duty of Loyalty

The statutory loyalty list is not exhaustive. It includes:

1. Account for benefits. Hold as trustee for the company any property, profit, or benefit derived in the conduct or winding up of company affairs, from use of company property, or from appropriating a company opportunity.
2. Avoid adverse dealing. Do not deal with the company as, or on behalf of, a person with an adverse interest, unless the transaction satisfies the conflict-of-interest statute.
3. Do not compete. Refrain from competing with the company before it dissolves.

The Duty of Care

The care duty sets a high bar. A manager breaches the duty of care only by grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law. A decision that simply turns out badly is not, by that fact alone, a breach.

Good Faith and Fair Dealing

Managers must discharge their duties and exercise their rights consistently with the obligation of good faith and fair dealing, under both the statute and the operating agreement.

For more, see what a breach of fiduciary duty looks like in a Florida business and these real-world examples of breach of fiduciary duty.

When Is an LLC Manager Protected From a Breach Claim?

The statute protects honest managers:

• Self-interest alone is not a breach. Conduct does not violate a duty solely because it also furthers the manager’s own interest.
• Reliance on others. A manager may rely on information and financial statements from members or employees the manager reasonably believes are reliable and competent, from counsel or accountants on matters the manager reasonably believes are within their expertise, or from a committee the manager does not sit on and reasonably believes merits confidence.
• Reliance must be honest. A manager who knows facts that make that reliance unwarranted is not acting in good faith.

Can an Operating Agreement Change an LLC Manager’s Duties?

Yes, within limits. Under section 605.0105, an operating agreement can reshape fiduciary duties but cannot eliminate the duties of loyalty and care outright.

If not manifestly unreasonable, the agreement may:

• Alter or eliminate aspects of the duty of loyalty.
• Identify specific types of activity that do not violate the duty of loyalty.
• Alter the duty of care, but not to authorize willful or intentional misconduct or a knowing violation of law.
• Alter or eliminate any other fiduciary duty.

The agreement may also set a method for disinterested and independent persons to authorize or ratify a specific act after full disclosure of all material facts. It may not relieve anyone of liability for bad faith, willful or intentional misconduct, or a knowing violation of law. Whether a term is manifestly unreasonable is a question of law for the court, judged as of the time the term became part of the agreement.

Careful drafting of LLC operating agreements sets these terms before a dispute starts.

How Does Florida Treat a Manager’s Conflict-of-Interest Deal?

If the statute’s requirements are met, a conflicted transaction is not void or voidable just because of the conflict. Section 605.04092 shifts the burden of proof based on how the deal was approved:

• Disclosed and approved: If the material facts were disclosed to or known by the managers who voted, and a majority of the disinterested managers approved, the challenger must prove the deal was unfair. In a member-managed company, or when the managers fail to or cannot act, approval comes from a majority-in-interest of the disinterested members. A single manager or member cannot approve it alone.
• Not properly approved: In a suit challenging the deal’s validity, the person defending the transaction must prove it was fair.
• Fair at the time: A transaction that was fair to the company when authorized, approved, effectuated, or ratified is not grounds for equitable relief or damages.

Related-party leases and loans can raise conflict-of-interest transaction and self-dealing issues.

When Is an LLC Manager Personally Liable for Damages?

Under section 605.04093, a manager is not personally liable for monetary damages for management or policy decisions unless the manager breached a duty and the breach also falls into a listed category:

• A violation of criminal law, unless the manager had reasonable cause to believe the conduct was lawful or no reasonable cause to believe it was unlawful.
• A transaction from which the manager derived an improper personal benefit, directly or indirectly.
• A distribution that violates the LLC Act’s distribution-liability rules.
• In a suit by or in the right of the company or a member, conscious disregard of the company’s best interest, or willful misconduct.
• In a suit by anyone else, recklessness, or an act or omission in bad faith, with malicious purpose, or in wanton and willful disregard of human rights, safety, or property.

A transaction properly approved under the conflict-of-interest statute, or fair to the company, is deemed not to produce an improper personal benefit.

Do the Duties End When the LLC Dissolves?

Partly. The duty not to compete ends at dissolution. The duties of loyalty and care, however, expressly cover the winding up of the company’s activities and affairs, so a manager who diverts assets during a wind-down can still face a claim.

Can a Member Sue an LLC Manager Directly?

Sometimes. A member may sue directly by pleading and proving an injury that is not solely the result of an injury to the company, or an injury from a violation of a separate statutory or contractual duty owed to that member. Otherwise, the claim belongs to the company and proceeds as a derivative action. The member must first demand action from the managers (or, in a member-managed company, the other members) and wait a reasonable time of up to 90 days, unless demand would be futile or waiting would cause the company irreparable injury.

See who gets the money if you win a derivative claim in Florida. For the evidence side, read how to prove a business partner breached a fiduciary duty, and check the statute of limitations for breach of fiduciary duty in Florida before time runs.

What Should Members and Managers Do Now?

Steps to take now:

1. Confirm the structure. Read the governing documents to see who manages.
2. Find the modifications. Look for clauses that alter loyalty, care, or conflict approvals.
3. Paper conflicts. Disclose related-party deals and obtain disinterested approval.
4. Watch for warning signs. Our guide to signs a co-owner is mismanaging your company covers what members should look for.
5. Know the exit options. If the relationship breaks down, review how to remove a business partner or member under Florida law.

Talk With a Florida Business Litigation Attorney

Jimerson Birr’s business litigation attorneys represent Florida members and managers in disputes involving LLC member rights and breach of fiduciary duty by an officer, director, or manager. Every dispute turns on its own facts and governing documents, and nothing here predicts the outcome of any particular matter. To discuss your situation, contact our team.