Duty waivers: how far loyalty bends

Every section of this manual so far drafted against silence. This one mostly drafts against the opposite problem: the default duties say too much. Members and managers owe each other fiduciary duties, loyalty and care, and the freedom of contract page carries the remarkable legal fact underneath this section: LLC statutes let the members reshape those duties by agreement, in some states down to nearly nothing. This section is about using that power on purpose, because most operating agreements either ignore it and leave a trap armed, or borrow someone else’s waiver and arm a worse one.

What the clauses do

The duty clauses modify four defaults. The competition rule: whether members or managers may run ventures that compete with the company. The corporate opportunity rule: whether a deal that could have been the company’s may be taken personally. The self-dealing rule: on what terms a member may transact with the company, and who must bless it. And the care standard: what quality of judgment a manager owes, and for which failures they can be sued, the exculpation clause that protects honest mistakes while preserving liability for bad faith. The law of how far each can bend is state-specific and lives on the state-law spine; the drafting question here is the same for all four: which duties does this deal actually need, owed by whom, to whom.

What silence costs

Everywhere else in this manual, silence under-protects. Here it over-protects, and the cost lands on ordinary life. Under the default duties, the member who owns two businesses, the investor who does deals outside the company, the manager whose day job touches the company’s industry, are all, technically, in breach or one angry partner away from the accusation. The real estate investor running a growing portfolio across several LLCs with different partners is the cleanest example: every new deal taken into a different entity is, under unwaived defaults, arguably an opportunity usurped from the partners in the last one. Nobody intends this. The duties were drafted for the faithless manager, and unmodified they catch the diversified one.

The cost stays invisible while everyone is friendly, which is the pattern this manual keeps finding. The breach claims surface when a relationship sours, as leverage in a dispute that is really about something else, and the member who spent years openly running a second business discovers that openness is not consent, and consent was never papered.

The real options

The workhorse is the permitted activities clause, and its craft is specificity. It names the members’ existing outside ventures, exempts them entirely, and then defines categories of future activity that are free: deals of a stated type, in a stated geography, below a stated size, whatever matches the members’ actual plans. Symmetry is the fairness test; each member’s carve-out should survive being read aloud to the others.

The corporate opportunity waiver pairs with it and needs one distinction drawn sharply: opportunities sourced through the company, found with its resources or its relationships, get offered to the company first, while opportunities from a member’s independent world are theirs. That line, sourced-through versus independent, does the work a blanket waiver does crudely, and it keeps the company’s own deal flow from walking out the door in a partner’s pocket.

Exculpation for the manager is nearly standard and should be: liability for bad faith, willful misconduct, and knowing violations of law, protection for everything else, because a manager sued successfully for ordinary misjudgment is a manager no sensible person agrees to be. What survives every waiver, in every state, is the covenant of good faith and fair dealing, and the strongest statutes still refuse waivers that are manifestly unreasonable, so the clause that purports to authorize actual dishonesty protects nobody and signals plenty.

Full elimination, the sophisticated-fund pattern where nearly all loyalty duties are contracted away, exists and is enforceable in the friendliest states, and it belongs where it came from: institutional deals where every party has counsel and the waiver is priced into the economics. Which brings up the trap.

The trap

The trap is the borrowed waiver. A two-partner operating company downloads or inherits an agreement drafted for a private equity fund, complete with the full elimination clause: no duty of loyalty, competition expressly permitted, every opportunity waivable, care reduced to the floor. Partner B signs without reading, the way everyone signs. Three years later Partner A takes the company’s largest customer relationship into a new entity, alone, and Partner B’s lawyer delivers the bad news: the waiver is enforceable, that is the entire point of the freedom-of-contract regime, and the betrayal was pre-authorized on page fourteen. The court is not rescuing anyone from a clause the statute expressly permits between adults.

The defense is a reading rule, and it belongs to whichever partner has less leverage: the duty section of any agreement put in front of you gets read against your actual business plan, and a waiver broader than the plan is a confession of intent. Partners who intend ordinary parallel activity ask for the scoped carve-outs above and get them easily. A partner who insists on total elimination in a two-person operating company is telling you, in enforceable writing, what they intend to do to you, and the correct response is drafted symmetry or a different partner.

The state-by-state defaults behind this section will get their specifics on this site’s state pages.