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Understanding the fiduciary duties of directors, corporate officers

Without a doubt, one of the most important decisions that a group of entrepreneurs will ever have to make is how they choose to organize their business. That's because each possible option -- from a limited liability company to a limited partnership -- has its own set of unique attributes covering everything from liability to tax treatment.

This is not to mention that each business entity also imposes unique requirements, otherwise known as fiduciary duties, on governing members. By way of example, consider the corporation, one of the more commonly utilized business entities owing to both its structure and relative insulation from liability.

For those unfamiliar with the structure of a corporation, it is essentially three different levels comprised of directors, officers and shareholders.

In general, the shareholders, who actually own the corporation, are in charge of electing the directors. The directors, in turn, manage the affairs of the corporation and appoint officers to handle the everyday business matters of the corporation. In smaller corporations, it's not unheard of for a person to actually hold two or even three of these titles.

As to why so many people make the decision to incorporate, it can be largely traced to its provision of limited liability to shareholders, directors and officers. Specifically, the personal assets of these parties are protected, meaning they cannot be held personally liable for the debts and obligations of the corporation.   

This isn't to say that there are no obligations associated with a corporation. Indeed, as to the aforementioned fiduciary duties imposed on both corporate directors and officers, it has long been recognized that they can essentially be subdivided into 1) the duty of care and 2) the duty of loyalty.

We'll start taking a closer look at these two fiduciary duties in our next post.

In the meantime, if your business has been hit with some manner of legal issue -- from shareholder disputes to contract disputes -- consider speaking with an experienced legal professional as soon as possible.     

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