Can a Partner Sue Another Partner in an LLC?

Business partnerships rely on trust. Each partner contributes money, time, and effort to help the company grow and thrive. When that trust is broken due to mismanagement, secrecy, or the misuse of funds, the impact can extend far beyond financial losses. 

So, can a partner sue another partner in an LLC? Yes, under certain circumstances. Below, we cover how lawsuits between business partners arise, what legal grounds you may have, and what to consider before taking that step. 

If a business dispute threatens your company's stability, Thorsnes Bartolotta McGuire can help. Our San Diego business litigation attorneys represent companies across California in matters involving fraud, breach of duty, and misconduct among partners. 

‍Contact us at (619) 236-9363 to schedule a confidential consultation.

When One LLC Partner Takes Legal Action Against Another

Limited liability companies (LLCs) operate through written agreements that define the rights, responsibilities, and methods for sharing profits. When one partner steps outside those boundaries, other partners, or the company itself, may have legal recourse.

A lawsuit may result when a partner's conduct damages the business or directly harms another member. Common claims include:

• Breach of contract or operating agreement,
• Breach of fiduciary duty,
• Fraud or misrepresentation,
• Negligence or mismanagement, and
• Theft or embezzlement.

Before filing, it's essential to identify who was affected. That answer, whether the loss impacted an individual or the company overall, determines what type of case can move forward.

Direct Lawsuit

A direct lawsuit is filed when a partner suffers a personal loss distinct from the company's setbacks.

Examples include:

• Being denied profits or distributions owed under the agreement,
• Being blocked from access to financial information, and
• Experiencing a breach of specific promises made between partners.

For instance, suppose two business partners agree that each will receive an equal share of quarterly profits. One partner later diverts those profits to a separate account without approval. 

The affected partner can bring a direct lawsuit to recover their share because the loss was personal, not corporate.

Derivative Lawsuit

When misconduct damages the LLC itself, such as draining funds, misusing assets, or compromising its reputation, the case must be filed on behalf of the business. This is called a derivative action.

A derivative suit seeks to recover losses for the LLC, not the individual filing it. Any money awarded goes back to the company, even if one partner initiated the claim.

Consider a managing partner who used company funds to pay for personal expenses. The financial loss belongs to the business. In that situation, the appropriate step would be a derivative action to recover those funds for the LLC.

Derivative suits have procedural requirements. Usually, the partner must first request that management or the other partner take corrective action. If that request is ignored or refused, the lawsuit can proceed in court.

What Are Common Grounds for Suing a Business Partner?

Disputes within an LLC can begin with a single broken agreement, an unapproved withdrawal, or an uneven distribution of responsibilities. When those issues start affecting company performance or individual interests, legal action may become necessary. 

Breach of the Operating Agreement

The operating agreement serves as the governing document for how the business operates. It outlines decision-making authority, financial responsibilities, and the distribution of profits. 

When a partner breaches these terms, such as transferring money without consent, locking others out of records, or failing to make agreed-upon payments, the wronged party can pursue a claim for breach of contract.

Breach of Fiduciary Duty

LLC partners owe one another a duty of honesty, fairness, and loyalty. They must act in the best interests of the business, not their own interests. 

When someone hides transactions, exploits company opportunities for personal gain, or mismanages funds for their own benefit, it can constitute a breach of fiduciary duty. Depending on who was affected, this could lead to a direct or derivative lawsuit.

Fraud or Misrepresentation

Misleading partners about revenue, debt, or upcoming deals can amount to fraud. Concealing financial losses, falsifying records, or misrepresenting the company's condition are serious violations that can justify legal action. Courts may also award punitive damages in extreme cases.

Mismanagement or Negligence

Partners responsible for overseeing finances or daily operations are expected to act with reasonable care. 

Consistent accounting errors, reckless spending, or neglecting essential business duties can serve as grounds for suing a business partner for negligence or mismanagement, particularly if these actions result in measurable financial loss.

Partner Oppression

In LLCs with majority and minority partners, disputes can occur when those in control use their authority to exclude or disadvantage others. Withholding profit distributions, blocking access to company information, or changing key terms without consent can all form the basis for a lawsuit.

Theft or Embezzlement

Diverting company funds, falsifying books, or using business assets for personal expenses are forms of theft or embezzlement. In these cases, civil and criminal liability may overlap. A lawsuit can seek recovery for financial losses and other damages to the company.

Intentional Misconduct

Conduct such as harassment, defamation, or interference with company contracts can also justify legal action, depending on the facts. Courts evaluate whether the behavior directly harmed a partner or the business itself before deciding which type of claim applies.

Other grounds may include a partner abandoning the business, behaving abusively toward other partners or members, or neglecting responsibilities that cause financial or reputational damage. 

Whether these situations justify if a partner can sue another partner in an LLC depends on the operating agreement and the evidence available to show how the conduct affected the company.

Thinking about suing a business partner or dealing with a dispute that threatens your company's future? 

Thorsnes Bartolotta McGuire advises business owners on their rights, legal options, and strategies for resolution. Book a free consultation here or call us at (619) 236-9363.

Reducing Conflict Before It Reaches Court

While lawsuits may be necessary in some cases, many disputes between LLC partners can be prevented or settled with foresight and open communication.

A Detailed Operating Agreement

A well-drafted operating agreement helps partners understand their rights and responsibilities from the start. It should cover:

• Voting and decision-making procedures,
• Partner duties and capital contributions,
• Profit distribution schedules,
• Rules for mediation or arbitration, and
• Exit or buyout procedures.

When expectations are clearly defined, conflicts are less likely to escalate.

Handling Disputes Promptly

Address potential issues promptly as they arise. Honest discussion, with guidance from legal counsel if necessary, can prevent minor tensions from growing into full-scale litigation.

Continuing Legal Oversight

Regular consultation with a business attorney protects the company's stability. Preventive legal advice helps identify risks early and ensures operations comply with state law.

The Downsides of Suing a Business Partner

Taking a partner to court can protect your interests, but it rarely comes without setbacks. A lawsuit between LLC partners can disrupt business operations, fracture relationships, and drain resources that would otherwise be used to fuel growth.

Operational Impact

• Lost time: Preparing documents, depositions, and testimony pulls attention away from running the business.
• Risk of dissolution: Severe disputes can leave the company unable to function, prompting a court to order dissolution.
• Countersuits: The partner you sue may respond with their own claim, increasing costs and complicating the case.

Damage to Reputation and Relationships

• Eroded trust: Litigation often permanently severs business and personal ties.
• Public disclosure: Court filings become public record, exposing financial details or internal disputes.
• Employee fallout: Internal conflict can unsettle staff, lower morale, and hinder productivity.

How Much Does It Cost to Sue a Business Partner?

Along with the strain litigation places on business operations, the financial cost can be substantial. The price of suing a business partner depends on the complexity of the case, the amount of money at stake, and whether the matter is resolved through negotiation, arbitration, or a full trial.

Attorney fees, expert witness costs, and financial audits can quickly add up. Even smaller partnership disputes can escalate to tens of thousands of dollars once the case progresses into formal litigation.

Due to these expenses, many companies seek alternative methods to resolve disputes before resorting to court. 

Alternatives to Suing a Business Partner

Litigation should be the final option. Before taking that step, consider these alternatives:

• Negotiation. Direct negotiation enables both sides to reach a practical solution, such as a buyout or repayment plan, without incurring the time and cost of court proceedings.
• Mediation. A neutral mediator helps both parties communicate and identify a compromise. While non-binding, mediation can preserve relationships and resolve disputes more quickly.
• Arbitration. Many operating agreements require arbitration instead of court. An arbitrator reviews evidence and issues a legally binding decision. This process is private and usually less expensive than litigation.
• Withdrawal or Dissolution. When collaboration becomes impossible, selling your ownership interest or dissolving the company may be the most efficient resolution.

Our San Diego Business Litigation Attorneys Are Ready to Help

Disputes between LLC partners can threaten the business you worked hard to build. Having experienced representation ensures your rights and your investment are protected.

Thorsnes Bartolotta McGuire has represented California businesses since 1978, securing more than $2 billion in verdicts and settlements. Our attorneys handle partnership disputes through careful negotiation and, when necessary, through litigation that safeguards your interests.

If you are facing internal conflict within your company or need guidance on the best way to respond, we can help. Call (619) 236-9363 or contact us online to arrange a confidential consultation with a San Diego business litigation lawyer.