Owning a business with others can be a gratifying and financially rewarding experience. Having business partners can allow for sharing in the financial risk and benefit from access to a diverse range of skillsets. However, serious conflict or wrongdoing by your partner may leave you wondering, can LLC members sue each other? Our article provides the answer.
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Can LLC members sue each other?
The short answer is yes, which we explain more carefully below. However, we also address why pursuing litigation against your fellow LLC member should not be done without full consideration of the possible consequences.
Understanding the cause of action against LLC members
Legal claims involving a multi-member LLC are unique in that they always involve more than two parties. You have the business entity (e.g., the LLC) and then each individual member. When one member takes an action against the best interest of the company or its members, it can be difficult to determine who has a cause of action. Is it the LLC or is it the individual member?
The answer will depend on the nature of the dispute and the surrounding context. Sometimes, it can be both the LLC and its individual members (regardless of LLC foreign ownership). Furthermore, that answer will determine whether you have a direct cause of action or a derivative cause of action against another LLC member. The distinction is especially important because it determines who recovers damages from a successful legal action.
A derivative cause of action against an LLC member
A derivative action is when one or more members of an LLC files a claim on behalf of the LLC against another member for their alleged wrongdoing. Generally, derivative claims arise when a member violates their obligations to the company, which are formally known as a breach of the fiduciary duties of LLC members. They include the following:
- Duty of care (i.e., not being negligent towards the company)
- duty of loyalty (i.e., refraining from self-dealings, usurping business opportunities, or taking other competitive action against the LLC).
A member of an LLC may other obligations that could create a derivative claim in addition to their fiduciary duties. Such obligations can come from state law, the LLC's operating agreement, and other breach of contract (e.g., NDA's, employment contracts, etc.). For ideas about what an LLC member's obligations may look like, please consider reviewing our Florida LLC operating agreement template.
A direct cause of action against an LLC member
In comparison, a direct action is claim from one member against their business partner. Direct causes of action can be difficult to discern and even more difficult in recovering against the responsible party.
Recovery is difficult because the suing member can only recover the amount of damages proportionate to their membership interest. A member's interest percentage will usually depend on the agreed terms contained in the operating agreement or records of capital contributions. Again, the nature of the misconduct will determine if an aggrieved member has a direct action based on application of the Florida Limited Liability Company Act.
Questions on the grounds for suing a business partner that often arise
You may still be wondering what can I sue my business partner for during the course of a business relationship. Below are some general answers to some of the most common questions on the topic. However, keep in mind that these answers are not legal advice and do not constitute an attorney-client relationship. You should contact your attorney if you have questions about the information in this section.
Can I sue my business partner for abandonment?
Business partners and LLC members are usually free to exit the business relationship according to the terms of any applicable agreements (e.g., an operating agreement). However, one member (or the LLC) may have a legal claim against an exiting member if their exit results in a breach of fiduciary duty or somehow causes harm to the business. Possible harm to the business could include loss of future business or the incurrence of added costs.
A member's exit from the business may mean the end of the LLC. If that's the case, you may need to know how to dissolve an LLC in Florida properly.
Can LLC members sue each other for emotional distress?
A claim for emotional distress can arise when one person's extreme behavior (e.g., physical acts, verbal abuse, etc.) causes distress to another. This type of misconduct is possible between two LLC members, which may create a legal claim.
Can you sue a business partner for embezzlement?
Unfortunately, embezzlement of money from a business by one of its members is a real possibility. The wrongful taking of company assets can certainly give rise to a lawsuit.
Can LLC members sue each other for bullying?
Harassment and other bullying behavior does happen in business settings. The nature of the bullying will determine if an LLC member has a legal claim against another. The conduct might create liability for intentional torts and, depending on how it affects the business, could be a breach of duty of care or some other violation against the company.
Can I sue my business partner for negligence?
Yes, you may have a cause of action against a business partner for their negligence. If the negligence causes physical injury to you, then that business partner may have personal liability. If the negligence relates to the affairs of the business and causes harm (e.g., financial loss), then a breach of LLC fiduciary duties is possible.
Can an LLC sue its own members?
As explained above, the answer is yes, an LLC may sue its own members through a derivative action brought by one of the other members of the company.
Steps to avoid suing an LLC business partner
Suing business partners is never an ideal situation. Resolving such conflicts through the courts can be a lengthy and expensive process. However, members of an LLC can take certain steps and precautions to mitigate the risk of misconduct or other issues that might create a legal claim. Some of these steps may include:
- Having well-drafted founding documents (e.g., operating agreement, articles of incorporation, partnership agreement, etc.).
- Addressing potential conflict early before it becomes a serious problem.
- Regularly seeking legal advice on LLC law and other business law issues to protect against potential blindspots.
- If conflict appears unresolvable, taking steps to liquidate your membership interest or dissolving the LLC may also be appropriate.
Prior to litigating against a fellow LLC member, other conflict resolution processes such as arbitration or mediation could also be helpful. In fact, some company agreements even mandate use of these tools before filing a formal legal claim.
Final points on suing a business partner in an LLC
Legal claims against business partners can be complex, fact-specific, and difficult to resolve without the assistance of a business lawyer or business law firm experienced in corporate relationships. Cueto Law Group is proud to assist LLCs or LLC members in navigating difficult conflicts and representing their best interests in court or other proceedings.
Contact Cueto Law Group today for a consultation concerning a lawsuit or another conflict involving your LLC.
