If you’re running a multi-member limited liability company (LLC) or thinking of starting one, you might want to know what happens when LLC owners, known as members, disagree.
Of course, you hope all the members always get along, but disagreements are almost inevitable; unfortunately, some will lead to disputes that might even end up in court. Whether one member can sue another depends on state laws and your LLC’s operating agreement.
The Operating Agreement
Most states do not require an operating agreement, but it’s a very important document. It defines members’ ownership percentages of members and profit and loss allocations. Those are the most important elements of the operating agreement, but it should also include the following:
- Each member’s rights and responsibilities
- Management structure and roles
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
The operating agreement should also specify whether or not members are liable to each other and sometimes even what can constitute liability.
Because an operating agreement should be designed to protect the rights of all members while barring misconduct and financial injury, it’s advisable to have an attorney’s help when drafting the document.
So, Can LLC Members Sue Each Other?
The operating agreement should specify that members are liable to each other or are not. If it states that they are liable to each other, then yes, members can sue each other. An operating agreement is crucial, as is your decision about how it is worded.
Legal action will be difficult if you include a provision that members are not liable to each other.
If you do not have an operating agreement, or if your operating agreement does not specify how disputes are to be resolved, some states have laws that will apply. Generally, these offer members legal recourse if they think they have suffered financial damage.
If there are no relevant state laws and the operating agreement does not specify liability, you will likely only be able to take legal action if you can prove you’ve been dealt a personal financial blow not experienced by other members.
Remember that since the LLC is its entity, it can be sued. So, if the company has financially injured you, you can sue the LLC.
Hopefully, you’ll never want to sue another member of your LLC or face being sued by another member. But if it does happen, it’s best to be prepared. You should seriously consider hiring an attorney to help with your operating agreement to ensure you have a reliable dispute resolution system in place.
Few situations are worse for a business than a divisive court battle.