Fiduciary Duties of LLC Members and Managers in Kentucky: What KRS 275.170 Requires

If you own part of a Kentucky limited liability company, the people running it owe you something. The question is what, exactly. Kentucky’s LLC Act gives a narrower, more contract-driven answer than most owners expect, and the difference matters the moment a co-owner starts treating company money or company deals as personal property.

Where the duties come from

Kentucky LLC fiduciary duties come from two places: the statute and the operating agreement. The statute is KRS 275.170, which sets the default standard of conduct for members and managers. The operating agreement can change that default, and the Act says so expressly. KRS 275.003 announces a policy of giving “maximum effect to the principle of freedom of contract” in operating agreements. In practice, that means the first document to read in any LLC dispute is the operating agreement, not the statute.

If the LLC has no written operating agreement, or the agreement is silent, the statutory defaults control.

The duty of care: a low bar

Under KRS 275.170(1), a member or manager is not liable to the company or the other members for an action taken or omitted in that role unless the act or omission amounts to wanton or reckless misconduct. That is a much more forgiving standard than ordinary negligence. A manager who makes a bad business decision in good faith is generally protected. A manager who ignores obvious warning signs, disregards the operating agreement, or acts with conscious indifference to the company’s interests is not.

For owners trying to hold a manager accountable, this means a “they ran the company badly” theory rarely succeeds on its own. The stronger cases involve loyalty, not competence.

The duty of loyalty: where most cases live

KRS 275.170(2) requires a member or manager to account to the company, and hold as trustee for it, any profit or benefit derived from a transaction connected with the company’s business, or from the use of company property, without the consent of the disinterested members or managers. That provision captures the classic self-dealing scenarios:

• Steering company business to an entity the manager secretly owns.
• Using company equipment, employees, or customer lists for a side venture.
• Taking a contract or acquisition that the company was positioned to take.
• Paying themselves “management fees” or “bonuses” the operating agreement never authorized.

Kentucky courts have also recognized common-law fiduciary duties for LLC members alongside the statute. In Patmon v. Hobbs, 280 S.W.3d 589 (Ky. App. 2009), the Court of Appeals applied the corporate opportunity doctrine to an LLC’s managing member who diverted the company’s leases to a competing business he formed. The lesson is that the statutory text is the floor, not the ceiling, for loyalty claims.

Dealing with the company as an outsider

The Act does permit a member or manager to lend money to, borrow from, or otherwise transact business with the LLC, and to be treated like any other party to that transaction. That is not a license for self-dealing. A loan to the company at an honest rate is one thing. A “loan” that strips the company of cash the member then uses personally is another. The disclosure and consent mechanics of the operating agreement usually decide which side of the line a transaction falls on.

Can the operating agreement eliminate these duties?

It can narrow them significantly. Kentucky’s freedom-of-contract policy allows operating agreements to define, expand, restrict, or in some respects eliminate duties, and to set the procedure for approving conflicted transactions. Owners who signed a lawyer-drafted agreement years ago sometimes discover that they consented in advance to the very conduct they now object to. The reverse is also true. Many agreements impose a stricter standard than the statute, which gives the complaining owner a much better claim than KRS 275.170 alone would.

Whatever the agreement says, a manager cannot contract around the obligation to act in good faith. Fraud, concealment, and bad-faith manipulation of the agreement’s own procedures remain actionable.

Who brings the claim, and in whose name

This is where owners often get tripped up. If the harm is to the company (a diverted contract, wasted assets, an inflated salary), the claim generally belongs to the company and must be brought derivatively, on the company’s behalf. If the harm is personal to the member (being denied a distribution the agreement guarantees, or being refused access to company records), the member can sue directly. Getting this wrong invites a motion to dismiss before the merits are ever reached. We cover derivative suits in a separate post.

What you can recover

The statute’s remedy is an accounting: the wrongdoer must disgorge the benefit and hold it in trust for the company. Courts can add compensatory damages for losses the company suffered, impose a constructive trust over assets that were diverted, order an injunction against continuing misconduct, and in appropriate cases remove the manager. Where the conduct is fraudulent or oppressive, punitive damages may be available under KRS 411.184.

Practical first steps

Before accusing anyone of anything, gather the documents. KRS 275.185 gives members a right to inspect the LLC’s records, including financial information and the operating agreement itself. A written demand for records, and the company’s response or silence, often tells you more about the strength of your position than months of speculation. From there, a well-supported demand letter frequently resolves the matter without litigation. When it does not, the record you built becomes the foundation of the complaint.

If you believe a co-owner or manager is putting their own interests ahead of the company’s, call (859) 225-9540 or contact us online to talk through your options.

Joseph D. Buckles is a civil litigation attorney at Buckles Law Office, PLLC in Lexington, Kentucky, with a focus on civil litigation and probate litigation.