Fiduciary duty refers to the legal and ethical obligation of individuals or entities to act in the best interests of another party, often seen in relationships like that of company directors and shareholders.
Starts at $0 + state fees and only takes 5-10 minutes
Last Updated: February 10, 2026
The typical business owner will likely encounter the term “fiduciary duty” at some point or another. But what exactly does “fiduciary duty” mean? This guide is here to help clear up this commonly misunderstood term, including why it can be important in the scope of running a small business.
So, what are fiduciary duties?
A fiduciary duty is a special type of legal obligation that one party owes to another. Essentially, when one person owes a fiduciary duty to someone else, the party who owes the fiduciary duty must act in a way that is beneficial or in the best interest of the other party. In fact, the party who owed the fiduciary duty has a legal and ethical obligation to put the interests of the other party above their own.
The party who owes the duty is referred to as the “fiduciary,” whereas the other party is referred to as the “principal” or the “beneficiary.”
There are a number of scenarios in which a fiduciary relationship may arise. Below are some of the most common types of fiduciary relationships:
In each of these scenarios, the fiduciary is the first party listed and the beneficiary is the second.
Importantly, there are two primary types of fiduciary duties to be aware of: (1) the duty of care, and (2) the duty of loyalty.
The duty of care essentially requires a fiduciary to make reasonably informed decisions on behalf of the principal/beneficiary. Thus, the fiduciary must consider all available options and information before making any decisions or taking action.
In the context of a corporation, specifically, this duty of care mandates that the entity’s directors inform themselves “prior to making a business decision, of all material information reasonably available to them,” per Smith v. Van Gorkem, 488 A.2d 858, 872 (1985).
This duty of care better ensures that the interests of the company and its owners are protected.
In addition to the duty of care, there is also a fiduciary duty of loyalty. The duty of loyalty requires that the fiduciary place the interest of the beneficiary above their own. Thus, the fiduciary may not use their role to benefit themself. This means that the corporate officers may not act in their own interest, economic or otherwise.
The duty of loyalty is essential as it helps to prevent self-dealing within a corporation. Moreover, it can instill greater confidence and trust in those running the business.
If someone owes a business owner fiduciary duties, that means they have a duty to act in the owner’s best interest. And when a fiduciary acts in a way that benefits someone else more than the business owner, they may have breached their fiduciary duty. As a result, this may entitle the entrepreneur to damages.
Recommended articles
ZenBusiness helps business owners with lots of things, including understanding terms like fiduciary duties. But they can help with a lot more than that. ZenBusiness offers a variety of tools and services to help people start, run, and grow a business, from business formation services to Worry-Free Compliance Services, and more. They’re a go-to resource for all things small business and entrepreneurship.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Ready to Start Your Business?
Scan to download
the ZenBusiness app
