Disputes among business partners are not uncommon. Even the strongest business relationships can be tested by disagreements over money, management, or direction. But what happens when things go too far?
Can one partner in an LLC sue another?
The short answer is: Yes. LLC members—commonly called partners in casual conversation—can sue each other in certain situations. These situations include financial misconduct, violation of fiduciary duty, exclusion from profits or management, and breaches of the LLC’s operating agreement.
Understanding LLC Structure and Member Rights
A Limited Liability Company (LLC) is a flexible business structure designed to combine the benefits of partnerships and corporations. Members of an LLC are considered owners and have specific rights and responsibilities outlined in the Operating Agreement and state law.
Members typically:
- Share in profits and losses
- Contribute to and withdraw capital
- Vote on major business decisions
- Have access to financial information
- Owe fiduciary duties to one another and the company
When those rights are violated or fiduciary duties are breached, lawsuits can follow.
Can LLC Partners Sue Each Other?
Yes, LLC partners can sue each other, though it should be a last resort after attempting other dispute resolution options.
Lawsuits typically arise when one partner believes the other has:
- Misused company funds or assets
- Violated the LLC’s Operating Agreement
- Excluded them from profits, decisions, or information
- Committed fraud or acted in bad faith
Two Primary Types of Lawsuits:
- Direct Lawsuit: When a member sues another member for personal harm—such as lost profits or exclusion from management.
- Derivative Lawsuit: When a member sues another member or manager on behalf of the LLC, claiming that the accused harmed the business itself.
We’ll explore both types in more detail below.
Common Legal Grounds for Partner Lawsuits
1. Breach of Operating Agreement
The operating agreement is the rulebook for your LLC. If a member violates its terms—by withholding profits, taking unauthorized actions, or ignoring voting procedures—another member may sue to enforce the agreement.
2. Breach of Fiduciary Duty
All members owe a fiduciary duty to act in the best interests of the LLC. If a member engages in self-dealing, fraud, or negligence, they may be held liable for damages.
3. Misappropriation of Funds or Assets
If a partner uses company money for personal gain or improperly diverts resources, it’s grounds for both civil lawsuits and potential criminal action.
4. Fraud or Misconduct
Knowingly deceiving fellow members or falsifying documents related to the LLC is actionable.
5. Withholding Financial Information
LLC members are generally entitled to view financial reports and business documents. Refusing access to such information may violate state law and the operating agreement.
6. Conflict of Interest and Self-Dealing
If a member takes actions that benefit themselves to the detriment of the LLC (e.g., working with competitors or funneling clients to their personal business), it can lead to a lawsuit.
7. Forced Buyouts Under Unfair Terms
Trying to force a partner out under deceptive or unfavorable terms—especially without the proper procedures outlined in the operating agreement—is a major trigger for litigation.
Types of LLC Member Lawsuits
Direct Lawsuits
Filed when one member suffers personal harm or damage. Common examples include:
- Being denied rightful distributions
- Being removed from management without cause
- Suffering reputational harm due to the actions of another member
Derivative Lawsuits
Filed by one or more members on behalf of the LLC. These aim to protect the business itself and recover losses suffered due to another member’s actions.
Examples:
- Suing a member who embezzled funds
- Suing a manager who failed to perform their fiduciary duties
Note:
Some states require that members first demand the LLC take action internally before filing a derivative lawsuit.
What Happens During a Lawsuit Between Partners?
The Legal Process:
- Filing a Complaint – The plaintiff submits legal documents outlining the allegations.
- Response – The defendant responds, either admitting or denying the claims.
- Discovery – Both parties exchange documents and evidence.
- Negotiation or Mediation – Many cases settle out of court at this stage.
- Trial (if needed) – If no agreement is reached, the case may go to court.
Possible Outcomes:
- Court-ordered damages
- Removal of a member
- Enforced buyout
- LLC dissolution
The Crucial Role of the Operating Agreement
A well-drafted Operating Agreement is your best protection against internal disputes.
Key Clauses to Include:
- Member roles and responsibilities
- Voting rights and procedures
- Profit and loss distribution
- Capital contributions
- Exit and buyout rules
- Conflict resolution procedures (e.g., mediation, arbitration)
Without an operating agreement, courts rely on state default laws, which may not reflect your specific intentions or provide adequate protections.
What If There Is No Operating Agreement?
In the absence of a written agreement, courts apply your state’s default LLC laws, which vary but generally assume:
- Equal voting rights among members
- Equal profit sharing
- Fiduciary duties are implied
This lack of clarity often leads to more litigation.
Can a Minority Partner Sue a Majority Partner?
Yes. Even if one member holds a smaller ownership percentage, they can sue a majority member for:
- Breach of fiduciary duty
- Abuse of power
- Unfair treatment or exclusion
Courts prioritize fairness and fiduciary obligations over ownership percentages. Majority members do not have unlimited control and must act in good faith.
Risks of Internal Lawsuits
While it may seem like the only option, suing your business partner can have serious downsides:
- High legal fees and court costs
- Damage to the business’s reputation
- Loss of clients and investors
- Emotional stress and relationship breakdowns
- Potential forced dissolution of the LLC
Litigation can drag on for months or years and may permanently damage your business and personal relationships.
Alternatives to Suing Your Business Partner
Before resorting to legal action, consider these alternatives:
1. Direct Negotiation
A frank and respectful conversation may resolve misunderstandings without legal interference.
2. Mediation
Bring in a neutral third party to help both sides reach a compromise.
3. Arbitration
This private legal process is less formal than court and can lead to binding decisions if agreed upon in the operating agreement.
4. Partner Buyout or Exit Strategy
One member may choose to sell their share and leave the business—based on fair valuation.
5. Amend the Operating Agreement
Clarifying vague terms and procedures can help prevent similar conflicts in the future.
How to Protect Yourself from Future Disputes
Create a Clear, Comprehensive Operating Agreement
Document All Financial Transactions and Decisions
Communicate Regularly and Transparently
Define Roles and Responsibilities Early
Agree on Dispute Resolution Methods in Advance
Real-Life Examples of LLC Member Lawsuits
Case Study 1: Misuse of Funds
A minority member in a digital marketing agency discovered that the managing member used LLC funds for personal travel and entertainment. The minority member sued, resulting in court-ordered restitution and the manager’s removal.
Case Study 2: Exclusion from Profits
In a real estate LLC, one member was systematically excluded from profit distributions and major decisions. After a lawsuit, the court ruled in favor of the excluded member and ordered an equitable buyout.
Case Study 3: Fraudulent Buyout
A founder tricked a newer partner into signing a buyout agreement under false pretenses. The partner sued, and the court reversed the buyout and awarded damages.
Yes. Equal ownership doesn’t prevent legal action if one partner acts against the LLC’s or the other member’s interests.
It can be. Legal fees, expert witnesses, and lost time can quickly add up. Alternatives like mediation or arbitration are usually more cost-effective.
Only if allowed in the operating agreement. Otherwise, legal action is required.
This varies by state and by the nature of the dispute, but typically ranges from 2 to 6 years.
Yes. Many lawsuits result in member removal, restitution, or buyouts without ending the LLC.
Final Thoughts: Can Two Partners in an LLC Sue Each Other?
Yes, they can—and sometimes they must. When trust is broken, money is misused, or agreements are violated, legal action may be the only recourse.
But litigation should never be the first step. It’s costly, time-consuming, and emotionally draining. That’s why smart business owners:
- Draft airtight operating agreements
- Communicate openly with partners
- Use mediation and arbitration to resolve issues early
Need help drafting a strong operating agreement or forming an LLC that’s legally sound?
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