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When does a business partner have a fiduciary duty?

On Behalf of | Nov 22, 2023 | Business formation, Contract breach

A partnership is a business formation owned and operated by two or more individuals or entities. It can come in the form of a general or limited partnership. A general partnership is the most basic form, where all partners share managerial responsibilities and personal liabilities. A limited partnership, on the other hand, can give one or more partners limited liability protection, but only if at least one partner remains a general partner with unlimited personal liability.

A partner who assumes more liability usually has more obligations and involvement. They engage in deals, transactions and agreements for the business. As such, they have a fiduciary duty to the partnership and their partners. A fiduciary duty is a relationship built on trust, trust that the partner will always act in the partnership’s best interests.

The fiduciary duties of a California business partner

All owners or partners of a general partnership owe the fiduciary duties of loyalty and care the partnership and to each other. They can act on behalf of the business and are in a position that can directly affect the business.

However, under a limited partnership in California, the general partner usually has control over business operations, while non-managing limited partners are more like passive shareholders or investors. They make investments to support business objectives but are not necessarily involved in directing or operating the business.

Therefore, a general partner has a fiduciary duty to the limited partners, but the limited partners do not owe the same duty to the general partners. Once a limited partner takes on an active role in managing or operating the business, they will also have a fiduciary duty to the partners.

The significance of fiduciary duties to a partnership

People enter partnerships because they have a shared interest in making a profit from the enterprise, so their fiduciary duty is essential and should be reciprocal. The partnership takes precedence over personal gain and self-serving ambitions. Once a partner violates their duty, the business could suffer, and other partners would no longer trust that partner to do business affairs on behalf of the partnership.