This is not a trick question, and the answer is – it depends. There are several advantages to using a Limited Liability Company (LLC) in Nevada. The Nevada Limited Liability Company Act affords owners (members) wide flexibility and freedom to decide how to operate and manage the entity. These are important decisions, usually made at the time the LLC is created. A Nevada LLC can be managed by the members as a whole, by designated managing member(s) or by the manager(s) that do not necessarily have to be members. Any person or entity considering becoming a member of a Nevada LLC should consider what duties the management of that LLC may or should have to the LLC and its members, and what happens when management mismanages. Management can be held liable to the LLC and/or members for acting contrary to the best interests of the company unless the members eliminated that liability in the operating agreement.
Unlike the laws governing Nevada corporations and partnerships, NRS Chapter 86 (which governs LLCs) does not specifically address fiduciary duties. Fiduciary duties arise when one party is under a duty to act for or provide advice for the benefit of another upon matters within the scope of the relationship between the parties. This statutory silence has been offered by attorneys as support for a conclusion that: 1) the Nevada Legislature did not intend for LLC managers to owe any fiduciary duties to the LLC or its members and 2) that no such fiduciary duties exist unless the LLC members provide for those duties in the operating agreement.
The early history of the Nevada Limited Liability Company Act (1991) reveals that the Nevada Legislature intended that LLC managers owe a fiduciary duty to the LLC and its members. But the Act gives members the power to expand, restrict or eliminate management liability to the LLC and the members for breach of contract and nearly all other duties, including fiduciary duties.
Opting out of fiduciary and other duties substantially limits the ability of the LLC and its members to pursue rogue management unless the bad acts rise to the level of a “bad faith violation of the covenant of good faith and fair dealing”, NRS 86.286(7). A member should cautiously evaluate any proposed operating agreement that wipes out the fiduciary duties management otherwise owes to the LLC and the members.
In 2013, the Senate rejected a recommendation by the Executive Committee of the Business Law Section of the State Bar of Nevada to revise the law to eliminate the default fiduciary duties unless those duties were specified in an operating agreement. In 2017, the same Executive Committee proposed Senate Bill 264 to clarify and limit the types of fiduciary duties members and management would owe to each other. The Senate killed SB 264, voicing concerns about piecemeal amendments to laws that appear to be functioning well.
Reasonable minds may disagree over the extent to which LLC management should owe fiduciary duties to the LLC and its members, the limits of management liability and what is best for Nevada LLCs and their members in this regard. While an operating agreement is perhaps the best means of documenting the understanding of the LLC members about management principles, an operating agreement is not required for a Nevada LLC. Many Nevada LLCs conduct business without an operating agreement, and certainly many LLC members are not fluent on the nuances of fiduciary duties. Unfortunately, there is no shortage of LLC management that engages in conduct that violates the operating agreement or the reasonable expectations of the members. For these reasons alone, the legislature’s reluctance to statutorily eliminate fiduciary duties owed by LLC management to the LLC and its members is warranted.
Michael R. Kealy, Vice President and Director, Parsons Behle & Latimer
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