Under California Corporations Code section 17704.09 there a big differences in member and manager duties depending on whether the LLC is manager-managed or member-managed. You should work closely with legal counsel when you are forming the LLC, including the preparation of your operating agreement if you have such an agreement. I have pasted section 17704.09 below in its entirety. However, for ease of reference for this discussion I am starting with section 17704.09(f) which discusses manager-managed LLCs. Remember, however, that you must also read, understand, and follow other relevant LLC instruments and documents such as the provisions in the operating agreement if there is such an agreement.

Manager-managed LLC

California Corporations Code section 17704.09(f) provides as follows:

(f) In a manager-managed limited liability company, all of the following rules apply:

(1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers and not the members.

(2) Subdivision (d) applies to the members and managers.

(3) Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.

Section 17704.09(f)(2) states that subdivision (d) applies to the members and the managers – section 17704.09(d) states as follows (and I will discuss the duty of good faith and fair dealing in a subsequent post – the duty of good faith and fair dealing can be implied by law (such as in every contract and even more specifically in insurance contracts), or may apply pursuant to specific contractual terms, or may apply statutorily (such as pursuant to section 17704.09)):

Section 17704.09(d): A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing.

Section 17704.09(f)(1) also states that subdivision (e) applies and which I have pasted immediately below, and that subdivisions (a), (b), and (c) apply and which are discussed further below:

Section 17704.09(e): A member does not violate a duty or obligation under this article or under the operating agreement merely because the member’s conduct furthers the member’s own interest.

Member-managed LLC

With respect to member-managed LLCs, section 17704.09(a)-(e) provide as follows:

(a) The fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c).

(b) A member’s duty of loyalty to the limited liability company and the other members is limited to the following:

(1) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity.

(2) To refrain from dealing with the limited liability company in the conduct or winding up of the activities of the limited liability company as or on behalf of a person having an interest adverse to the limited liability company.

(3) To refrain from competing with the limited liability company in the conduct or winding up of the activities of the limited liability company.

(c) A member’s duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(d) A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing (thus, again, a member as a member is subject to a duty of good faith and fair dealing, but not in every action or conduct).

(e) A member does not violate a duty or obligation under this article or under the operating agreement merely because the member’s conduct furthers the member’s own interest.

You can see that under Cal. Corp. Code section 17704.09 the duties that are owned by a member in a member-managed LLC are more onerous than in a manager-managed LLC. However, there is still the decision to be made whether your LLC should be member-managed or manager-managed, and that is a discussion that you need to have with your legal counsel when you are forming or perhaps later amending your LLC.

Below I have pasted section 17704.09 in its entirety:

California Corporations Code section 17704.09

(a) The fiduciary duties that a member owes to a member-managed limited liability company and the other members of the limited liability company are the duties of loyalty and care under subdivisions (b) and (c).

(b) A member’s duty of loyalty to the limited liability company and the other members is limited to the following:

(1) To account to the limited liability company and hold as trustee for it any property, profit, or benefit derived by the member in the conduct and winding up of the activities of a limited liability company or derived from a use by the member of a limited liability company property, including the appropriation of a limited liability company opportunity.

(2) To refrain from dealing with the limited liability company in the conduct or winding up of the activities of the limited liability company as or on behalf of a person having an interest adverse to the limited liability company.

(3) To refrain from competing with the limited liability company in the conduct or winding up of the activities of the limited liability company.

(c) A member’s duty of care to a limited liability company and the other members in the conduct and winding up of the activities of the limited liability company is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(d) A member shall discharge the duties to a limited liability company and the other members under this title or under the operating agreement and exercise any rights consistent with the obligation of good faith and fair dealing.

(e) A member does not violate a duty or obligation under this article or under the operating agreement merely because the member’s conduct furthers the member’s own interest.

(f) In a manager-managed limited liability company, all of the following rules apply:

(1) Subdivisions (a), (b), (c), and (e) apply to the manager or managers and not the members.

(2) Subdivision (d) applies to the members and managers.

(3) Except as otherwise provided, a member does not have any fiduciary duty to the limited liability company or to any other member solely by reason of being a member.

David Tate, Esq.

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David Tate, Esq. (and inactive CPA)

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David Tate, Esq. (and inactive California CPA) – practicing only as an attorney in California.