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Can LLC Members Sue Each Other?

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Published on February 7, 2022

Updated on February 8, 2022

Can LLC Members Sue Each Other?

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Can LLC Members Sue Each Other?

Unfortunately, disputes do arise in business. You hope it never happens, but humans do occasionally disagree. If you’re a member of a limited liability company (LLC) or thinking of forming one, you may be looking ahead and wondering if the LLC owners, or members, will be able to sue each other. The answer is, well, it depends. 

To learn more about LLCs, you can read this Step By Step article

The Operating Agreement

An LLC’s operating agreement should dictate, to a certain extent, whether members can sue each other. An operating agreement is not usually required but is highly recommended, particularly when there are multiple members. The operating agreement should clearly define the following:

  • The percentage of each member’s interests in the LLC
  • How profits and losses will be allocated to each member
  • Each member’s rights and responsibilities
  • The management structure and management roles of members
  • The voting rights of each member
  • Rules for meetings and voting
  • What happens when a member sells their interest, becomes disabled, or dies
  • How disputes between members are resolved

It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members and avoid future issues. Note the final item on the list – this is the most relevant item when it comes to this topic.

Can Members Sue Each Other?

The operating agreement will either specify that the members are liable to each other, or that they are not liable to each other. If it states that they are liable to each other, then yes, they can sue each other. You can see from this fact that having an operating agreement is critical, as is your decision about what to put in it. If you include a provision that members are NOT liable to each other, you’ll have to hope that disputes never occur because legal action will be difficult.

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 some recourse if they think that they have suffered financial injury. 

If there are no overriding laws and the operating agreement fails to address the question, generally, you will only be able to take legal action if you can prove you’ve been damaged personally, outside of the business, or that you have been damaged while other members were not.

However, since the LLC is its own entity, it can be sued, so if you have been damaged by the company, you can sue the LLC itself. 

In Closing

In short, members of an LLC may be able to sue each other. The crucial concern on this issue is the operating agreement and how it is written. Many people draw up their own LLC operating agreements, which can lead to some key elements being overlooked. It’s highly recommended that you have an attorney help draw up your agreement to make sure all members’ rights are protected.