Getting involved in the development and management of a new business can be an exciting career prospect. Especially in the age of tech start-ups, increasing numbers of young entrepreneurs and experienced industry professionals are taking the leap into starting their own company. While full of rewards, being an officer or director of a company also brings with it certain risks and potential liabilities.
Recognizing the Importance of Fiduciary Duties
Fiduciary duties are a legal concept that places certain responsibilities, and liabilities, on those individuals who are involved in the management of a business. Because operating a business requires a degree of trust, those who take on such rolls owe certain duties to the business itself and to those who have invested in the business, such as shareholders.
While fiduciary duties may not seem like a big deal in the midst of the craziness of starting a new company, they can have significant ramifications. If a shareholder or representative of the company feels that an officer or director is not upholding his or her duties, they can sue for breach of fiduciary duty in court.
Who Owes What?
Not every employee of a company has a fiduciary duty. Fiduciary duties are held primarily by officers of the company, such as a CEO or a CFO, and the board of directors of the company. Sometimes fiduciary duties can apply to a shareholder who holds a majority interest in a company. This person is known as a controlling shareholder because they can essentially direct or control the actions of the corporation.
There are several types of fiduciary duties to be aware of. They include:
- Duty of Obedience
- Duty of Loyalty
- Duty of Care
- Duty of Good Faith and Fair Dealing
So Many Duties, So Little Time
The duty of care requires officers and directors to carry out the duties that have been delegated to them and to follow the mission or the purpose of the business. This can be of particular concern to non-profit organizations that have mandated charitable purposes.
The duty of loyalty requires the officers and directors to be loyal to the company and to avoid conflicts of interest or side-deals that would put the individual’s personal interests above the interest of the company. For example, taking a contract away from the company to handle personally instead might violate this duty.
The duty of care requires officers and directors to act with reasonable care in managing the affairs of the business, including making well-researched and thoughtful decisions about operations. Officers or directors must do their due diligence and act in the best interest of the business.
Finally, the duty of good faith and fair dealing requires officers and directors to act honestly and with integrity in their business dealings. They must avoid engaging in any activities that could constitute fraud or dishonesty, or that might get them in separate legal trouble.
Make Sure You Understand Your Responsibilities From the Beginning with Blado Kiger Bolan, P.S.
The easiest way for officers and directors of a new company to avoid legal difficulties down the road is to understand their responsibilities and duties from the get-go. At Blado Kiger Bolan, P.S., our business attorneys can assist you with all aspects of early state business formation and management, including an overview of applicable fiduciary duties. For more information contact us online or at 253-272-2997.