In today's Freedom Friday blog and email newsletter, we're going to continue to talk about business partnerships, and this week, we're going to talk about fiduciary duties. Specifically, I want to talk about breaches of fiduciary duties by a business partner. So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “How should my small business handle a breach of fiduciary duty in a business partnership?”
First of all, what is a fiduciary duty? Fiduciary duty is a legal relationship between two or more parties. One of them is a fiduciary, and the other party is the principal, which is usually the party that benefits from the fiduciary relationship. Generally, in a business partnership, fiduciary duties are mutual among the partners who owe the duty to one another and to the partnership itself. Fiduciary duties in a partnership include the duty of honesty, duty of care, duty of loyalty, duty of fairness, and duty of good faith. Fiduciary duties start when the partners first negotiate their partnership and continue until the partnership is dissolved and the affairs of the partnership are settled. However, a partner can leave the partnership and end his or her fiduciary duties.
So, who owes fiduciary duties in a partnership? There are two different types of partnerships: a general partnership, and a limited partnership. In a general partnership, all partners owe a duty to each other and the partnership as a whole. In a limited partnership, there is a general partner, and there are limited partners. The general partner owes a fiduciary duty to the limited partners and to the partnership itself. However, limited partners usually provide capital resources, but are not involved in managing the business, and so non-managing partners generally do not owe fiduciary duties to the other partners and to the partnership.
Now, what is a breach of fiduciary duty? A breach of fiduciary duty is a breach of trust by a partner to the other partners and/or the partnership who are owed such a duty. This occurs when a partner fails to uphold financial obligations to the partnership. The duty is an obligation, obligations imply a level of trust, and when that trust is violated, the duty has been breached, usually resulting in a financial loss to the business. Examples of a breach of fiduciary duty include a partner taking a business opportunity away from the company for his or her profit, a board of directors taking action against the interest of the company for its financial gain, a partner engaging in insider trading, a partner keeping a portion of the profits to which he or she is not entitled, negligence in management, and misrepresenting or concealing relevant information from the partnership which results in financial loss or damages.
If a breach of fiduciary occurs, or is alleged to occur, in a partnership, the number one thing that must occur is that the partner who caused the breach needs to be removed from the partnership and held accountable for his or her actions. This is not usually handled by agreement, although if attorneys get involved, there may be an opportunity for pre-suit negotiations to resolve the situation. However, many times pre-suit negotiations fail, and a lawsuit is filed by the damaged partners, the business, or both, against the partner who allegedly caused the breach. If you can prove to the court that the partner concealed profits, then you may recover money damages. You also can sue for accounting, injunctive relief, and even dissolution or removal of the partner who caused the breach and the financial damages to the business.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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