A business partner may be sued for not working if the partnership agreement requires the partner to work. The grounds for suing a business partner include breach of agreement and breach of fiduciary duty.
Author: Brad Nakase, Attorney
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Creating and running a new business with one or more partners can be an exciting time. At the beginning, everything feels new, fast-paced, and full of thrills. Even though not everything will go as planned, there is comfort in the knowledge that all the company’s partners share the same dreams and goals when it comes to growing the business and making it a success.
But sometimes business relationships go bad. What happens when partners can no longer get along?
When a business partner engages in behavior or conduct that is detrimental to the business, an owner may wonder what can be done about the situation. Can members of a limited liability company sue each other? Can a business partner be sued for negligence? Can a business partner be sued for abandonment? These are all very common questions. As it happens, there are several grounds for suing one’s business partner, which will be discussed below.
A business partnership may be defined as two or more individuals who work together to build and run a company. This means that the partners all play a part in the decision-making process. Some people may be comfortable working with others and collaborating, but they may be less happy about sharing the power of decision-making. Often, a partner may be able to force the others into an agreement without the other partners’ consent. Luckily, there are steps that may be taken to stop one partner from creating deals without the approval or knowledge of the other partners.
There are two different types of partnerships: general and limited. A general partnership makes it so that all co-owners of a company have equal power and rights to the income of the business. All partners have equal power to make decisions, including those that affect the management of the company. In return for these rights, all partners have personal liability for the business’ liabilities. This means that if the business runs out of income, the partners are required to make up the difference. A limited partnership, by contrast, means that one set of partners has full supervisory control over the company and power that another set does not enjoy. Limited partners cannot enter into contracts that would bind the business, but they are not liable for the business’ debts and obligations.
Some business partner disputes can be solved without taking legal action. However, on occasion, pursuing litigation is the only realistic option. Below are a few of the most common reasons for suing one’s business partner.
Many partnerships have an official partnership agreement that details the business obligations and duties of the company’s partners. If a company has a legitimate, enforceable partnership agreement, then an owner and his or her partner are subject to the rules laid out in that contract. If a business partner breaks one or more of the rules, or terms, of that agreement, and the owner can demonstrate that this breach caused harm to the company, then the owner will have a strong case for breach of the partnership claim.
Business partners owe one another a fiduciary duty to act in the best interest of the company and partnership. This means that each partner places the interest of the partnership and the business at large over their own personal interests, or individual gain. Typically, a breach of fiduciary duty qualifies as a violation of the partnership agreement. However, even if there is no partnership agreement, it may still be possible to sue a business partner who has put his or her individual interests over the interests of the company or partnership.
While it is possible to sue one’s business partner for negligence, one must be able to prove two things in order for the claim to be considered valid. An owner must be able to demonstrate that:
If an owner can prove both of these things to be true, then he or she may have a legitimate negligence claim.
A business partner owes the partnership a duty of care to make decisions in good faith. If he or she fails to do this, then there may be the basis for a negligence claim.
Abandonment happens when one partner leaves the partnership before the proper ‘winding up’ or dissolution process by which they are released from their obligations. Much will depend on the terms detailed in the partnership agreement. It may be possible to take legal action against the business partner to enforce one’s rights. To determine whether one can sue a partner for abandonment, it is best to consult an experienced business dispute attorney.
Limited liability companies are structured a little differently than partnerships. While a general partnership is controlled by a partnership agreement, an LLC has an operating agreement as its form of governance. An operating agreement may detail precisely when and how one member can sue another. In fact, some operating agreements may say that members are not allowed to sue other members at all. For instance, an agreement may call for arbitration to solve disputes, rather than legal action.
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