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Rhode Island Legal Blog

Monday, October 1, 2018

Fiduciary Responsibilities and Your Business

As a business owner, you have certain responsibilities that must be fulfilled.While being a sole proprietor gives you more leeway, business owners who use any other business formation must be familiar with fiduciary responsibilities. These obligations extend to corporate officers and even managers in some situations. So, what are fiduciary responsibilities for business owners and corporate officers?

What are Fiduciary Duties?

A fiduciary duty is a legal requirement that applies to anyone who has a relationship of trust with another person or organization. While fiduciary responsibilities extend to more than just the business context, they are often associated with corporations and partnerships.

Other examples of this type of relationship include:

  • Trustee and beneficiaries
  • Investment manager and participants in an investment plan
  • Banker and customers
  • Attorney and client

In these relationships, the fiduciary often accepts legal ownership or control of property or an asset that belongs to someone else. In the business context, corporate owners and managers have this type of obligation to stockholders and investors in the business.

An Overview of Fiduciary Responsibilities

Several duties apply to those in fiduciary roles. Below is a general overview of responsibilities that likely apply to corporate owners and officers.

  1. Obedience - Officers and directors must carry out their roles according to  the requirements of the corporate bylaws, articles of incorporation, and other controlling documents. They are obligated to follow voting procedures and executed decisions made by the stockholders or investors. They must also fulfill their obligations under state and federal law.
  2. Loyalty - Business owners and officers  have a duty of loyalty to the corporation and their shareholders. This means they must  put the interest of the shareholders and the company ahead of any personal aspirations or goals. Any conflict of interest should be decided in favor of the business, and officers cannot use information gained in their roles in a way that would harm the company.
  3. Care- Diligence and care are essential duties in the corporate context. If corporate officers make decisions without thoroughly investigating the implications of those decisions, that could seriously endanger the company as a whole. They should act as prudent investors and decision makers and consider how the stockholders are affected in making virtually every decision involving the company.
  4. Good Faith and Fair Dealing - Officers, directors, and owners are required to act with honesty, fairness, and good faith in everything they do for the business. This requirement applies to daily operations of the company as well as significant decision-making functions. This duty dovetails  with the obligations of obedience, loyalty and care.
  5. Disclosure - Those who make important decisions for the business must disclose relevant information about those decisions to others. The duty of disclosure is often referred to as a “duty of candor.”  Officers, owners, and directors not only have a duty to to their shareholders, but to the other key decision makers as well. There is also a duty to disclose potential conflicts of interest which coincides with the duties of loyalty, good faith and fair dealing.

The Takeaway

Given the significant fiduciary responsibilities associated with running a business, owners, directors, officers and managers are well advised to seek proper legal representation in fulfilling these important duties.


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