When deciding to go into business with a partners or partners, people need to be aware that in many ways a business partner is like a spouse. Business owners who succeed together do not need to always agree, but the successful owners have a relationship of trust, respect, equal division of effort, willingness to compromise, and an equal willingness to stick together through the rough times.
The law in Indiana imposes certain obligations upon co-owners of a business, whether those “partners” (lawyers hate to loosely use that term partners, and the reasons why will be explained in later posts) are shareholders in a closely held corporation, members of a limited liability company, or partners in a partnership. The most important of these obligations is that each shareholder/member/partner owes fiduciary duties to his fellow shareholders/members /partners, as well as to the company itself. This duty is the same in Indiana regardless of whether the business is a corporation, partnership or limited liability company.
The fiduciary duty that is owed is to deal fairly, honestly and openly with the fellow shareholders as well as with the company. This has been sometimes described as dealing with the “utmost good faith”. Examples of a breach of this duty including situations where a shareholder learns of a business opportunity and takes advantage of that opportunity without allowing the company an opportunity to participate; setting up a competing business; and using one’s majority shareholder status to cause the company to enter into agreement that are solely for the benefit of the majority shareholder.
There are countless ways that the fiduciary duty can be breached. As a general rule, if you have to think about what you want to do and are wondering if it is a breach of fiduciary duty, it very likely is. To be safe, simply deal openly and honestly with your fellow shareholders.
As mentioned at the beginning of this post, business partners are like spouses, and, just like when a marriage is going through a divorce, business break-ups are messy, expensive undertakings that can drag on for years. Hopefully it is nothing you will ever have to live through.
In the meantime, always remember the fiduciary responsibilities owed to fellow shareholders and members, and continue to deal openly, honestly, and in the utmost good faith with each other and with the company of which you are an owner.