Whether you are a shareholder in a closely-held corporation, one half of a partnership, or a member of a limited liability company, you and your business partners owe each other a lot. You are supposed to put the business’s interests before your own. You are supposed to be loyal. You are supposed to act in good faith. Likewise, your fellow shareholders, partners, and members owe you the same.
Just as importantly, or perhaps more so, all of you as owners of a Minnesota business owe your s-corp, c-corp, LLC, or partnership an expected level of fidelity, loyalty, and good faith. After all, in your eyes, your business is your baby.
In the eyes of the law, however, your business is a legal entity that can own and sell property, earn income, and pay taxes. Additionally, it can be sued and sue others. Needless to say, this is quite a bit more responsibility and power than the average toddler, or even the average person, intuitively understands.
Am I Solely Responsible for My Business in a Partnership?
The powers of a business can seem like a great deal for you to be responsible for. Even if you only own the smallest sliver of a business, you owe these responsibilities. But that also means that everyone else onboard is just as responsible as you. The law imposes the same burden on everyone who owns a business with others—whether you own 15%, 49%, 51% or 95% of the company.
Put simply, you are all in this together, as if that wasn’t already obvious. The founding principles, and therefore your basic responsibilities, boil down to you acting with integrity and openness with your other business partners and always acting with the company’s best interests in mind. If you don’t, how can you expect the same of anyone else?
Majority vs. Minority – What’s the Big Difference?
While the baseline obligations of a business owner – being a good person, really – typically remain universal, in some cases responsibilities may increase in direct proportion to your ownership stake. This is especially true if you are part of the controlling, majority owners. But even as a non-controlling, minority owner with fewer shares, not as many ownership units, or with less of a percentage, you still owe duties to the business and your fellow owners. As an owner of 15% percent of the stock, you have the same rights as someone that owns 75%, just not as much voting power.
Neither one of you can start up a directly competing business across the street. Neither one of you can help yourself to the company’s bank account so you can spend the weekend as a high roller in Vegas. Neither one of you can pay your kid’s private school tuition with the company checkbook. Neither one of you can take a kickback on the new contract that’s coming in next week and keep it for yourself.
These are easy and extreme examples. But they make the point that you both owe one another an obligation to treat each other fairly, openly, and honestly. When one of you stops upholding your end of the bargain or your responsibilities, trouble is sure to quickly follow.
In Minnesota, the duties or obligations the law promises to you and that you must provide your fellow owners do not change depending on how your privately-owned business is organized. That means it includes closely held corporations, s-corps, limited liability companies, and partnerships. Extrapolated further, this means that you can hold someone accountable for unfair business practices that harmed your company, regardless of who did it, whether it be the CEO or the kid in the mailroom.
Yes, It’s True, You Are All Fiduciaries Already
One thing that you and your co-owners of your business might not understand is that you are all fiduciaries of one another and of your business. Stay with me here and don’t let the legalese turn you off. This is nothing new and you already act this way daily. This is actually a very natural concept that you already know; the only thing unfamiliar is likely the term fiduciary.
A “fiduciary” is “[a] person who is required to act for the benefit of another person on all matters within the scope of their relationship.” Fiduciary, Black's Law Dictionary (8th ed. 2004). Think parent/child, priest/parishioner, agent/client, trustee/beneficiary. (Trust in Latin is fiducia – that’s enough Latin already). The duty imposed on fiduciaries is the highest standard inferred by the law. So what does that mean to you as a business owner just trying to make a buck?
Essentially, there are two components to the standard of conduct required by Minnesota law that apply to businesses. One: the duty of loyalty; and Two: the duty of care. Over 100 years ago, the Minnesota Supreme Court, in a case where the directors of an almost bankrupt corporation approved a loan to the corporation secured by a mortgage on the corporation’s real estate, only to foreclose on the mortgage and leave all the other creditors out to dry, described the duties owed as follows:
Upon the plainest principles of right, fair dealing, and common honesty, such a transaction ought, in equity, to be held to be fraudulent as to other creditors. The relation of directors to their corporation is essentially a fiduciary one, and upon sound principles of public policy they are, as a general rule, prohibited from dealing with the property of the corporation for their own benefit, very much as a trustee is disqualified from purchasing, for his own advantage, the property of his cestui que trust [that was French, not Latin and just means “beneficiary”].
Taylor v. Mitchell, 80 Minn. 492, 496, 83 N.W. 418, 420 (1900).
Interesting to Be Sure, But What Does That All Mean?
To put that into terms we can all understand: don’t be a cheat, a liar, or a thief. Or quite simply, apply the Golden Rule. Treat your business partners as you want them to treat you and expect your partners to treat your business as you treat it yourself. When dealing with your business partners, comply with (and demand the same in return) the triad of fiduciary duties:
- Be loyal
- Act in good faith
- Exercise due care
To get help exploring the duty of loyalty in more depth and see how the law determines when a business deal belongs to your company, or may be something kept for yourself, contact the Minneapolis business litigation lawyers from MKT Law and request a confidential consultation today. We are led by Attorney Mark K. Thompson, who has earned a perfect 10.0 “Superb” Avvo rating and been included in the Super Lawyers® Rising Stars℠ list, so you know you can trust us with your case, no matter how complicated it might seem.
Call 612.260.5109 for the experienced and knowledgeable representation you deserve.