PERMISSIBLE COMPETITION BY BUSINESS OWNERS
Generally speaking, the owners of businesses owe a duty of loyalty to the business and its fellow owners. This includes the obligation not to compete with the business unless the opportunity has been fully presented to the governing body of the business and the business has made an affirmative decision not to pursue it. Sometimes this is referred to as the “corporate opportunity doctrine” even though it applies to all closely held business types.
Note that this duty applies to all owners of the business no matter how large or small their ownership stake might be. If you are going to become an owner of a business, it is important to think about what opportunities you may be forgoing if they might arguably fall within the sphere of the type of business being pursued by that company.
A consequence of not properly disclosing a business owner’s competing interest is that the company may be able to claim the profits from that competing business. To avoid this, there should be full disclosure of the opportunity and concurrence by the governing body of the company. In a corporation, this would be the Board of Directors. In the case of an LLC, it could be the members or a manager, depending on how the operating agreement is written.
It is also possible to build into the organizing documents a repudiation of the corporate opportunity doctrine. In other words, you could form a company where all the owners are free to pursue other business interests without being concerned about competing with the common business.
In these days where it is not uncommon to have a “side hustle”, it is all the more important to avoid unwanted complications, hurt feelings, and litigation by addressing clear cut competition and “gray” area situations early and correctly.