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Define Fiduciary Duty

The definition of fiduciary duty is as follows: "An obligation to act in the best interest of another party." In the case of a corporation, this interest pertains to the company's board. The board will have a direct responsibility to ensure that the interest of shareholders are always at the forefront of the decisions made.

The Three Types

Fiduciary duty can be broken down into three basic types. These types may change in accordance to state laws, but generally, the following three types are seen:

  • Duty of Care: Care must be used when decisions are made. As a director or officer, it's your duty to make decisions with the utmost of care on the behalf of the corporation. Shareholders rely on you to ensure that care is exhibited during each business decision made.
  • Duty of Loyalty: Your own interests must never come before the interests of the shareholders or the corporation as a whole. The duty of loyalty is such that you cannot benefit from an opportunity, compete with the corporation or gain profit, unless clearly stated, due to a decision that you make. Decisions that are made that are suspicious in nature may be approved by shareholders as long as full disclosure and approval is given. The goal is to be honest and execute full disclosure at all times.
  • Duty of Good Faith: One good way to define fiduciary duties is that, as a fiduciary, you must make all decisions based on good faith. This type overlaps with the duty of loyalty quite a bit. Essentially, the decisions that you make, as a director or officer, must, in good faith, be in the best interest of the corporation and the shareholders at all times.

The duty that is given will change based on the status of the company. The fiduciary duties of directors and officers will vary depending on whether or not the corporation is solvent or insolvent.

Solvent Corporations

Directors and officers of a corporation that's currently solvent have a duty to the corporation and the shareholders.

Insolvent Corporations

Directors and officers must still owe fiduciary duties when the corporation is insolvent. During this time, you'll owe these duties to creditors to ensure that they're rightfully paid.

Majority Shareholders

Shareholders may also have a fiduciary duty. This arises when majority shareholders are present. These shareholders would have a duty to minority shareholders to ensure that any transactions made between the business and majority shareholder are always done in fairness.

If you have yet to incorporate, we can help you get started so you can start choosing your fiduciaries.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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