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Realizing the Fiduciary Duties in Partnerships

fudiciary duty.jpgWhen two or more people engage in business for profit, with or without a formal written agreement, they are partners engaged in a general partnership. Partners have fiduciary duties to each other. Depending on the type of business relationship you have (limited or general) partnership, fiduciary duties will vary. In California, Corporate Code ยง16404 dictates the fiduciary duties of partners, along with any written terms of agreement between the partners. Fiduciary duties expose partners to liability when they fail to live up to their obligations.

Fiduciary duty, in the partnership relationship, is one of trust, loyalty and confidence. Each partner is obligated to act in good faith and for the common benefit of all partners in all transactions that further the interests of the partnership. This also includes the duty to refrain from taking advantage of another partner or an opportunity meant for the business.

Determining When a Fiduciary Duty Arises

Individuals in a limited or general partnership, who are engaged in a management role, will be found to owe a fiduciary duty to the partnership. Typically, general partners in any kind of partnership will be found to owe a fiduciary duty to the partnership because they participate in the daily operation and supervision of the business. Non-management limited partners who participate in operating or directing the partnership could also be considered to have a fiduciary duty to the partnership. Partners or limited partners who only contribute capital and nothing further to the partnership will not be considered to owe a fiduciary duty like a general partner would, as identified above.

Identifying Fiduciary Duties

Fiduciary duties include:

  • The duty of good faith and fair dealing requires the partners to act honestly and to show good faith and fairness in all partnership transactions. This duty starts when the business is formed and continues until the dissolution or sale of the business.

  • The duty of loyalty requires general partners to place the business ahead of their own personal interests or other business interests they may have. It also requires partners to avoid any conflicts of interest. The partnership should never be used for the sole benefit or advantage of one partner.

  • The duty of care requires each general partner involved in the management of the partnership to act reasonably. When business decisions are made, based on reasonable foundations, the business judgment rule will preclude the partner(s) from being liable for business decisions because they were made in good faith, even though it may have resulted in a major loss to the partnership.

  • The duty of disclosure requires each general managing partner, while managing and supervising the business operations, to act candidly and disclose the appropriate information to allow the partnership to make informed decisions. This includes knowing the risks and benefits that accompany an important partnership decision.

Consult an Attorney

If you believe one or more of your business partners are violating their fiduciary duty to the partnership, you should contact an experienced San Jose business law attorney who will assist you in making that determination and holding the partner(s) responsible for their improper actions.

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