Part 3: Owner Fiduciary Duties
A. Fiduciary Duties — What Owners and Partners Actually Owe
The duties of care and loyalty in plain terms, and when they matter most among co-owners.
You owe your co-owners more than a handshake
Once a business has more than one owner, each owner (and any manager or director, depending on entity structure) takes on fiduciary duties to the business and to the other owners. These duties exist whether or not they're written into your operating or partnership agreement — they're imposed by state law as a baseline for anyone with authority over a shared business.
The duty of care
The duty of care requires owners and managers to make business decisions with reasonable diligence and good information — not perfection, but genuine attention. In practice, this means actually reviewing financials before major decisions, seeking relevant expert input (accounting, legal, industry-specific) when a decision calls for it, and not rubber-stamping major commitments without understanding them. Courts generally give business owners significant deference for good-faith decisions that turn out badly (the "business judgment rule") — the duty of care is mainly a problem when a decision was made carelessly, not when it was made reasonably and simply didn't work out.
The duty of loyalty
The duty of loyalty is the one that generates the most disputes among SME co-owners. It requires putting the business's interests ahead of your personal interests in situations where they conflict — not diverting business opportunities to yourself or a separate venture, not competing with the business while you're still an owner, and not using company resources, information, or relationships for personal benefit at the business's expense.
Where this shows up in practice
The duty of loyalty most commonly comes up in a few recurring scenarios: an owner starting a side business that competes with or draws customers from the shared business, an owner steering a lucrative opportunity or contract to themselves personally rather than to the company, and an owner using the business's employees, equipment, or customer relationships for a personal project. None of these require bad intent to create liability — an owner who genuinely believes they're not competing can still breach the duty if a court or the other owners see it differently, which is exactly why potential conflicts are worth disclosing and addressing explicitly rather than assuming they'll go unnoticed.
B. Self-Dealing and Related-Party Transactions
How to structure and disclose deals with insiders — family members, co-owners, or affiliated companies — so they hold up later.
Why related-party deals draw scrutiny
It's common and often perfectly legitimate for an SME to do business with an owner's family member, an affiliated company under common ownership, or a co-owner personally — leasing property from an owner's LLC, hiring a spouse, or buying supplies from a company a co-owner also owns. These deals aren't inherently improper, but they get scrutinized more closely than arm's-length transactions, because the built-in conflict of interest makes it harder to know whether the terms are actually fair to the business.
The fair market value standard
The core requirement for any related-party transaction is that its terms reflect what the business would pay or charge an unrelated third party for the same arrangement — fair market value, not a favorable insider rate. If an owner is leasing office space to the business from a property they personally own, the rent should match comparable local commercial rates, not an above-market figure padded to benefit the owner at the business's expense.
Disclosure and approval
Beyond fair pricing, related-party transactions should be disclosed to and approved by the other owners, not entered into quietly by the owner with the conflict. In a multi-owner business, this typically means a vote or written consent from disinterested owners, documented at the time the transaction is entered into — not reconstructed after the fact if the arrangement is later questioned.
Why the paper trail matters more than the deal itself
Even a perfectly fair related-party transaction can look suspicious in hindsight without contemporaneous documentation — a written lease with market-rate terms, board or owner meeting minutes reflecting disclosure and approval, and an independent comparison (a market rent survey, a competing quote) supporting that the terms were fair when made. If the transaction is ever challenged by another owner, a lender's due diligence, or a buyer during a sale process, this documentation is what separates a legitimate business arrangement from something that looks like the owner quietly enriching themselves at the company's expense.
