Owners of a business have a number of different fiduciary duties they owe to the business. This means that there are high standards of care owed to the business once you create or purchase the entity. One of these duties is the duty of loyalty. This duty requires the decision-making business owner to act with the benefit of the business in mind and not his own personal interest. Essentially, undivided loyalty to the organization.
There are a number of ways this duty can manifest itself for practical purposes. The most common is when a business owner is presented with an opportunity that he can take advantage of himself or his business can take advantage of as an entity. Being an owner means putting the interest and advantages of the business first and letting the business take the opportunity. At the very least, the owner has the requirement to disclose the opportunity to the rest of the businesses’ owners or board and see if there is the interest and financial ability to take advantage of the project. If the business elects not to take the opportunity, then the individual owner can pursue it on their own.
This could come up in real estate transactions, business deals, and especially when there is contention among owners about the ongoing prospects of the business. In the last case, one owner who simply wants to move forward with the work of the business is breaching his fiduciary duty of loyalty by not bringing the work first to the business, even if that means less profit for him personally.
Another common problem business owners run into when dealing with the duty of loyalty is when they are interested parties in a transaction the business undertakes. This means the owner stands to make a personal profit from the transaction, is dealing with another business he owns, or is doing the transaction with a family member. These transactions are common, but can be problematic if not properly disclosed and any owners or directors who are disinterested allowed to have a say in the transaction.
Transactions where one of the business owners is an interested party must be fair to the business itself. Many larger businesses and organizations adopt a conflict of interest policy that requires disclosure of all material facts before the transaction occurs and a vote by the rest of the decision makers. This problem can arise, for example, when a small business needs to relocate and one owner decides to personally buy a new building and then lease it to the business. While this can save the business and be wonderful for both parties, all details of the purchase and lease need to be reviewed by the rest of the owners before the transaction occurs.
A final part of an owner’s duty of loyalty is confidentiality in regards to the business. No co-owner wants one business owner sharing all the financial or legal details of the entity unnecessarily. If you need help setting up a business or understanding how the duty of loyalty impacts a transaction you’re handling, be sure to call the team at Virtus Law Firm at 612.888.1000 or email us at firstname.lastname@example.org. We are experts in corporate law and are happy to help your business reach its goals.