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  • Writer's pictureW. Cory Reiss

How to avoid betrayal and scorn in a business divorce.

A small business is more like a marriage than most people think.

You’ve got to be thoughtful. You’ve got to divvy up the work fairly. And if one of you cheats, there’s probably going to be a messy divorce.

Litigation among previously blissful business partners often arises when one or more of them decide to part ways and compete. Sometimes, the departing partner even secretly directs clients and business opportunities away from the company. That’s surely a betrayal, but who it hurts most is a serious legal question.

Whether the offending party might be liable for more than just breaching an LLC’s operating agreement or a corporation’s by-laws, and therefore potentially larger damages, likely depends on whether he or she owes fiduciary duties of loyalty, good faith, and due care. In limited liability companies, a managing member owes fiduciary duties to the company, but not to other members. That means any claim against a manager belongs to the company and needs to be pursued accordingly unless the member suffered injury that is clearly distinct from the company’s injury.

In corporations, majority shareholders may owe fiduciary duties to minority shareholders. Some judges have recently interpreted North Carolina law to impose those duties on minority shareholders acting together if they own enough shares to equal a majority when combined—meaning, you might not even know you owe fiduciary duties until you’ve breached them, even if unintentionally.

Believe it or not, a decent claim for breach of fiduciary duty that benefited the breaching partner in some way can support a claim for punitive damages. Now that’s really dangerous territory.

When in doubt about your fiduciary status, check your by-laws or operating agreement, which can alter the duties that state statutes would impose on owners. 

And remember: If you’re thinking about doing something you know your partner wouldn’t like, you might really regret it in the end.

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