CORP § 16404

Partner Fiduciary Duty & Loyalty Rules | CORP § 16404

CORP § 16404 outlines California partner fiduciary duties: loyalty (accounting for profits/opportunities and no competing) and care (no gross negligence).

Official text CORP § 16404 — California

(a) The fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subdivisions (b) and (c).

(b) A partner’s duty of loyalty to the partnership and the other partners includes all of the following:

(1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.

(2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.

(3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

(c) A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(d) A partner shall discharge the duties to the partnership and the other partners under this chapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

(e) A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.

(f) A partner may lend money to and transact other business with the partnership, and as to each loan or transaction, the rights and obligations of the partner regarding performance or enforcement are the same as those of a person who is not a partner, subject to other applicable law.

(g) This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

Text as published in the 2026 snapshot of the code.

Source: Vaquill Open US Law, compiled from official state publishers (huggingface.co), reproduced under license CC BY 4.0.

Read this provision at the official source →

What it actually says

Section 16404 defines the duties partners owe each other, and it defines them narrowly on purpose. Subdivision (a) says the fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set out in subdivisions (b) and (c) — a closed statement rather than an open-ended standard.

The duty of loyalty has three components. To account to the partnership and hold as trustee for it any property, profit or benefit derived by the partner in the conduct or winding up of the business, or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity. To refrain from dealing with the partnership, in the conduct or winding up of the business, as or on behalf of a party having an interest adverse to it. And to refrain from competing with the partnership in the conduct of its business before dissolution. The third is the one that decides most disputes about a partner's side venture, and note its time limit: the duty not to compete runs before dissolution, and § 16603 terminates it on the partner's dissociation.

The duty of care in subdivision (c) is deliberately low: it is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Ordinary carelessness by a partner is not a breach. Subdivision (d) adds an overarching obligation of good faith and fair dealing in discharging duties and exercising rights, and subdivision (e) makes clear that a partner does not violate a duty merely because their conduct furthers their own interest. Subdivision (f) allows a partner to lend money to and transact business with the partnership on the same footing as a non-partner. Whether particular conduct — a diverted opportunity, a competing venture, money taken from the account — breaches subdivision (b) is a fact-heavy question for a lawyer.

When it applies

A partner taking money out of the partnership account for personal use
A partner setting up a competing business while still in the firm
An opportunity offered to the firm that one partner took personally
A partner contracting with the firm through a company they own
A partner using client lists or partnership information for their own benefit
A partner whose carelessness has cost the business money

What this section does not say

It does not make a partner liable for ordinary mistakes. The duty of care is limited to gross negligence, recklessness, intentional misconduct or a knowing violation of law.
Self-interest is not by itself a breach. Subdivision (e) says a partner does not violate a duty merely because their conduct furthers their own interest.
The duty not to compete does not last forever. Subdivision (b)(3) applies before dissolution, and § 16603 terminates it on the partner's dissociation.
It does not prevent dealing with the firm. Subdivision (f) allows a partner to lend money to and transact business with the partnership on the same terms as a non-partner.
It is not the whole list of duties. The partnership agreement may impose further obligations, and § 16405 governs the actions a partnership or a partner may bring.

Worked examples

Invented situations, written to show how the wording bites. They are not real cases, not judgments and not precedent, and nothing here predicts what would happen in yours.

Illustrative example

One partner in a two-partner firm quietly sets up a company and begins moving clients to it while still a partner.

How the wording applies

Subdivision (b)(3) makes it a breach of the duty of loyalty to compete with the partnership before dissolution, and subdivision (b)(1) requires any benefit derived from partnership business to be held as trustee for the firm. What this turns on is timing: everything done before dissociation is within the duty, and section 16603 terminates the duty not to compete the moment the partner leaves.

How the parties settled it

The departing partner accounts to the firm for the profits earned on the moved clients up to the date of departure, the firm waives any claim after that date, and no restraint is imposed going forward.

Illustrative example

A supplier offers a distribution opportunity to a firm, and one partner takes it personally without telling the others.

How the wording applies

Appropriating a partnership opportunity is expressly within the duty of loyalty in subdivision (b)(1). The fact this hinges on is who the offer was made to and in what capacity: an opportunity that came through the firm's business is the firm's, while one offered personally in an unrelated context may not be, and subdivision (e) makes clear that merely furthering one's own interest is not itself a breach.

How the parties settled it

The opportunity is transferred into the partnership with the partner credited for the costs they advanced, or, if the supplier will not agree to that, the partner accounts for an agreed share of the profits for a fixed period.

Related sections

CORP § 16202 Profit business coowners form partnership: CORP § 16202 CORP § 16603 No compete duty ends; management rights end - CORP § 16603 CORP § 16807 Partners must pay deficits on winding up - CORP § 16807 CORP § 16306 Joint and several liability for partners (CORP § 16306)

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We copy this text from the official publisher and re-check it against that source on every page load, but we cannot guarantee it is complete, current or free of error, and we accept no liability for any reliance on it. An amendment can take effect before a consolidation catches up. The publisher's own copy is linked below; where the two differ, it is the official one that counts.

This page reproduces the text of CORP § 16404 in force at the date shown and explains it in general terms. It is not legal advice and takes no account of the circumstances of your case, which can change the answer completely. For a live dispute, for limitation periods, and before taking any step in court, consult a qualified lawyer in California.

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