Posted by: Robert Markette
May 31, 2006

In an earlier post, I discussed the differences between a corporation and a limited liability company.  In that post, I mentioned the lack of case law governing LLCs, in comparison to corporations.  (And offered my opinion that the courts would look to corporate case law in deciding LLC questions.)  Well, the Indiana courts recently ruled on an issue in relation to LLCs that was previously undecided.  

The opinion from the court came down on May 22 and addresses, amongst other things, the fiduciary duty, or duty of good faith and fair dealing, members of a small LLC owe to each other.  The case involves a suit alleging self-dealing by a member of an LLC.  One of the issues in the case was whether the members of an LLC owe a fiduciary duty to fellow members.  

In this case, the Court acknowledged the limited amount of case law regarding LLCs generally and mentioned the complete lack of case law on the question of the duty owed by members (owners of an LLC are called members).  The Court then analogized an LLC with few members to a closely held corporation.  A closely held corporation is a corporation with relatively few shareholders with shares that are not traded on a public exchange.   The court then ruled that the members in an LLC owe the same fiduciary duty to fellow members as do shareholders in a closely held corporation.

I mention this case, primarily, because it reinforces the idea that for small corporations and small LLCs, there are few, if any, practical differences.  I also mention it, because it illustrates that when a closely held company (corporation or LLC) begins to have disputes amongst the owners, the owners should keep in mind they have an obligation to their fellow owners.  For those owners that fail to abide by that duty, the fiduciary duty does provide the other owners with legal remedies.

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