Fiduciary Duties in Indiana LLC’s and the Common Misunderstandings that Lead to Costly Disputes

For many Indiana entrepreneurs, forming a Limited Liability Company (“LLC”) can provide a flexible structure, a shield from personal liability, and the freedom to run the business as they see fit. But when the owners, referred to as “members,” of an LLC do not understand their fiduciary duties, small disagreements can quickly escalate into contentious litigation. 

Whether the business is family owned and operated or a multi-member company, understanding the duties and responsibilities of the members pursuant to Indiana law is essential. 

What Is a Fiduciary Duty? 

The Indiana Business Flexibility Act (“IBFA”) imposes specific obligations on the members and managers of LLCs. These obligations, known broadly as fiduciary duties, ensure that owners and managers act in the best interest of the company, not just themselves. 

Core fiduciary duties include: 

1. Duty of Loyalty

Members with managerial authority must avoid: 

• Self-serving transactions
• Usurping company opportunities
• Competing with the company
• Misusing company assets or confidential information

The legal standard does not require perfection, but it requires honesty, fair dealing, and the absence of personal gain at the company’s expense. 

2. Duty of Care

Members must act: 

• With the diligence of areasonably prudentperson 
• In a manner theyreasonably believeto be in the company’s best interests 
• With adequate information and proper oversight

In practice, this means documenting decisions, supervising financials, and avoiding reckless or uninformed conduct. 

Common Misconceptions: 

Misconception #1: “We can decide things however we want: we’re an LLC.” 

LLCs are flexible, but not a free-for-all. Although operating agreements can modify many duties, they cannot eliminate bad faith, intentional misconduct, or knowing violations of law. Owners who assume they can “contract around everything” often find themselves surprised in court. 

Misconception #2: “If it benefits me, and I’m an owner, it automatically benefits the company.” 

A frequent litigation trigger occurs when a managing member pays themselves more, hires their own company as a vendor, or diverts business opportunities. Even if the owner believes the decision is justified, courts examine whether the conduct unfairly disadvantages the company or other members. 

Misconception #3: “Minority owners have no say.” 

Minority members may have many statutory rights, including: 

• Access to books and records
• Protection from oppressive conduct
• The ability to pursue derivative claims on behalf of the company

Owners often underestimate how quickly internal disputes can become fiduciary-duty lawsuits when minority rights are ignored. 

How Disputes Commonly Start in Closely Held LLCs 

Most fiduciary-duty lawsuits begin with: 

• Unequal compensation or distributions
• Excluding an owner from management
• Withholding financial information
• Using company funds for personal benefit
• Shifting valuable opportunities to another business

Because these companies rely heavily on personal relationships, once trust breaks down, litigation usually follows. 

How to Prevent Fiduciary Duty Disputes 

A few preventative steps go a long way: 

1. Draft a clear, customized operating agreement that addresses voting rights, compensation, member duties, and dispute resolution mechanism.
2. Maintaingood record keeping including meeting minutes and written consents. These documents create a record that protects owners from allegations of misconduct.  
3. Maintaintransparency by regularly sharing financial statements, tax returns, capital accounts, and key business information. 
4. Seek legal advice before majortransactionsespecially when owners could have conflicting interests.  

Final Takeaway 

Fiduciary duties in Indiana LLCs are often misunderstood, yet they should serve as the guiding principles for members when navigating major decision. Any missteps, especially around loyalty, conflicts, and transparency, can expose owners to expensive and protracted litigation. By understanding these duties early and structuring clear guardrails, LLC members can protect their business, their relationships, and shield themselves from personal liability. 

If you are considering forming an LLC, or if you already have an LLC and have any questions, please contact McNeelyLaw LLP by calling (317)825-5110 

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.