Restrictions on Limiting Fiduciary Duties Owed Under the Illinois Limited Liability Act
Changes to the Illinois Limited Liability Company Act (the “LLC Act”) become effective January 1, 2022. The upcoming changes to the LLC Act affect the ability of operating agreements to alter or eliminate certain fiduciary duties owed by LLC members.
LLCs are owned by their members and are generally governed by some combination of the company’s operating agreement and the LLC Act. Under common law, members of an LLC owe fiduciary duties to other members, including the duties of loyalty and care. The duty of loyalty means a member cannot compete with or put her own interests above the company’s interests. The duty of care means a member agrees to treat the LLC as a reasonably prudent person would treat the business as if it were her own. The current LLC Act requires members of a member-managed company to discharge their duties to the company and the other members and to exercise their rights consistent with “good faith and fair dealing.” The LLC Act amendment clarifies that these statutory duties do not limit any fiduciary duties of loyalty and care owed at common law unless the restriction in the operating agreement is clear and unambiguous. In other words, your LLC’s operating agreement should thoroughly and specifically address these duties.
Starting in 2022, the LLC Act will permit operating agreements to identify specific activities or examples of conduct that do not violate the duties of loyalty or care and spell out the standards by which the members’ fiduciary duties are to be measured. This change to the LLC Act imposes a contractual covenant of good faith and fair dealing to operating agreements and aids LLCs and their members in understanding which activities will violate the operating agreement, thereby liberating an LLC and its members from ambiguity and unwanted litigation.
If you would like to schedule a consultation to prepare, revise or review your LLC’s operating agreement or for any other business-related matter, please contact Joseph A. LaPlaca (email@example.com) or Roenan Patt (firstname.lastname@example.org) at (312) 368-0100.