I often get questions from Minnesota small business owners about their rights when dealing with other business owners. This article explains the basic rights of small business owners. This is part one of a series on the fiduciary duties that Minnesota business owners owe to each other and their business:
- Minnesota Business Owners Owe Fiduciary Duties
- Breach of Fiduciary Duties in Minnesota
- Dealing with a Breach of Fiduciary Duties
Introduction to Minority Business Owner’s Rights & Fiduciary Duties
First, some basic information may be helpful. The rights and duties of small business owners depend on whether they are minority business owners or majority business owners.
Minority & Majority Business Owners
Business owners who own less than 50% of a business are considered “minority owners.” Those who own or control over 50% are “majority owners.”
Business Owner Rights and Fiduciary Duties
Business owners have rights and owe duties to the other owners. These rights and duties are especially important to minority owners because they have no control over the business. The duties that business owners owe to each other are called “fiduciary duties.” When one business owner has a right, that right creates a fiduciary duty on the part of the other owner. For example, if one owner has a right to information, the other owner has a fiduciary duty to disclose that information. These fiduciary duties are explained in more detail below.
Difference Between Shareholders, Partners, & LLC Members
||Partner or Managing Partner|
Owners have different names depending on their business entity type—corporation, partnership, or LLC. Owners in a corporation are called shareholders. Owners in a partnership are called partners. Owners in an LLC are called members.
Board of Directors and Board of Governors
Corporations have a board of directors that is elected by shareholders and oversees the corporation’s officers. LLC’s have a similar body, but they are called a board of governors. A board of governors is optional for an LLC. Often, an LLC will operate like a partnership where the partners handle all management, control, and operations of the business.
In a corporation, the board of directors oversees the officers. Officers include the president, CEO, treasurer, secretary, and other positions that may be named as officers in the corporation’s bylaws. In an LLC, the equivalent of an officer is a manager. Partnerships may also have a manager to oversee the day to day operations of the business. In a partnership, this is called a manager or managing partner.
Similar Rights & Fiduciary Duties
Business owners owe each other fiduciary duties, and each has the rights the arise from those fiduciary duties, regardless of whether the business is a corporation, partnership, or LLC. The precise fiduciary duties vary, depending on the business type. Also, individual businesses may add or reduce (if permitted by law) the rights and duties of each business owner.
Examples of Minnesota Business Owner Rights
Business owners may have a number of rights. Again, the rights that you have as a business owner will depend on the unique circumstances of your business and your business formation documents (articles, bylaws, owner agreements, etc.).
- Right to Approve Gifts
- Right to Approve Major Changes in the Business
- Right to Be Treated in Accordance with Your Reasonable Expectations
- Right to Employment
- Right to Full Disclosure of All Information Material to the Business
- Right to Honesty from Other Shareholders
- Right to Inspection (Access Company Information)
- Right to Loyalty of Other Shareholders
- Right to Prevent Other Owners from Competing
- Right to Prevent Other Owners from Self-Dealing
- Right to Prevent Other Owners from Using Business Assets for Personal Benefit
- Right to Share In Dividends
- Appraisal Rights
- Preemptive Rights to Buy Stocks (Right of First Refusal)
Examples of Minnesota Business Owner Fiduciary Duties
Each business owner right has a corresponding fiduciary duty. The corresponding fiduciary duties owed by a Minnesota shareholder, LLC member, or partner may include
- Fiduciary Duty of Loyalty
- Fiduciary Duty of Disclosure
- Fiduciary Duty to Not Compete
- Fiduciary Duty of Honesty
- Fiduciary Duty of Care
- Fiduciary Duty to Act within Reasonable Expectations of the Owners
- Fiduciary Duty to Not Convert a Business Asset to Personal Use
- Fiduciary Duty to Share Business Opportunities
Business owner rights and fiduciary duties arise from common law (precedent established in legal cases) and statute. The applicable statute depends on the business type.
A business attorney experienced in small business fiduciary duties should analyze your situation before you assume you have any particular rights or fiduciary duties. This analysis will include a review of your business’s formation documents, including articles or incorporation, articles of organization, partnership agreement, member control agreement, bylaws, buy-sell agreement, etc.
Breach of Fiduciary Duties in Minnesota
If you are a Minnesota business owner having problems with another owner in your business, your options may include
- Demand Letter
- Information Disclosure Request
- Temporary Restraining Order (TRO)
- Temporary Injunction
- Permanent Injunction
- Order for Receivership
- Order to Replace the Managing Owner or Management
- Disgorgement of Funds
- Minority Shareholder Oppression Claims
- Report to the Board in Preparation for a Shareholders Derivative Suit
The approach you use will generally depend on whether you want to remain in business with the other owner, the severity of the other owner’s breach of fiduciary duties, and practical (non-legal) factors.