Can I Take My Business Partner to Court?

You can take a business partner to court by suing the partner. A business partner may be sued for embezzlement, breach of fiduciary duty, fraud, or negligence.

Brad Nakase, Attorney

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Example of When to Sue A Business Partner

Samantha and Leah are partners in a business venture called Yoga Lily, a yoga and pilates studio based in Los Angeles. The company has recently been doing very well, as the local community enjoys the offered rooftop classes and once-a-month events with dogs and goats. However, the company accountant has recently come to Samantha with a worrying discovery. For some reason, funds have disappeared. After an investigation, Samantha discovers that Leah has been taking out a substantial amount every month to pay for her luxury high-rise apartment and a Range Rover. Devastated, Samanatha wonders whether she can take her business partner to court, and whether she should.

Is It Possible to Sue a Business Partner?

As any California business litigation lawyer knows, suing a business partner is never a pleasant prospect. Filing a lawsuit against a partner is making a dispute even more toxic and adversarial. It is likely that both an owner and his or her partner will spend a lot of money in legal fees with no guarantee of a good outcome for either individual or the business. Therefore, it is a good idea to seek alternatives to litigation when possible, especially if both partners wish to continue running their company together.

While it is best to avoid suing one’s business partner, sometimes there are situations where a lawsuit is the only option. If a business partner is behaving in a way that is damaging to the company or that goes against his or her duties to the company, then a lawsuit may indeed be the best choice. If an owner decides to proceed with a lawsuit against his or her partner, they are best advised to consult an experienced business litigation attorney.

When Can an Owner Sue Their Business Partner?

When two or more individuals form a partnership, the goal is for the partners to work together in harmony to make the company a success. Sadly, there are many situations where this collaboration does not work out. That said, not every unfortunate circumstance will result in a valid legal claim against one’s business partner. That said, there can be times when there are indeed grounds for a lawsuit. An individual can sue their business partner if any of the following situations are true:

  • The business partner has committed fraud or theft. If the partner stole money or property from the company, an owner can file a claim to attempt to recover the funds or items. It is important to note that theft and embezzlement are criminal matters in addition to civil.

Example: John and David are partners in a business venture. Two years into their relationship, the company accountant comes to David with a disturbing discovery. For the past six months, a significant portion of the business’ funds have gone missing from their bank account. After an investigation, David learns that John has been stealing money from the company. He has been using the money to buy sports cars and trips to Europe. David decides to take John to court over the theft of company funds.

  • The business partner broke his fiduciary duty to the company. A partner owes an obligation to his or her other partners and the company at large. A fiduciary duty may be breached when a partner acts in his or her own interests instead of doing what is right for the company.

Example: Hank and Lyle have been partners in a business venture for the past five years. Normally, they tell each other everything to make sure the company runs smoothly. However, Lyle has recently made a series of bad deals which have lost the company money. Embarrassed, Lyle does what he can to hide these deals from Hank and the rest of the company, even blaming the losses on other people. When Hank discovers that Lyle has been lying to protect his own image, he accuses Lyle of breaching his fiduciary duty to the company.

  • The business partner breaks any contractual agreements that the company has. There may be a wide variety of agreements, such as a non-disclosure agreement, a non-compete agreement, an employment agreement, and a partnership agreement. When one of these contracts in breached, the partner who is the victim of the breach may sue for damages. These agreements would include contracts that were entered into by co-partners in a venture.

Example: Alec and William have been partners in a business venture for ten years. When they first started their company, both men signed a non-compete agreement, in which they promised not to work for a competitor after leaving the company. Now, ten years later, Alec is leaving the company, looking for a new adventure. However, he immediately signs with a competitor. By breaking his previous company’s non-compete agreement, Alec has put himself at risk for a lawsuit should William choose to take legal action.

  • The business partner violates the company’s intellectual property rights. If the business has a patent, trademark, or copyright, then a partner cannot personally use the intellectual property without the express permission of the company.

Example: Adam and Louis are business partners in a company that specializes in advanced robotics. Their company owns a number of patents and trademarks due to its focus on proprietary technology. A few years into their partnership, Adam discovers that Louis has been selling some of their intellectual property to a competitor as a way of lining his own pockets. Adam sues Louis for violating the company’s intellectual property rights.

There are many more situations where a business owner may be able to bring a legal claim against his or her partner in civil or criminal court.

What Are Some Alternatives to Filing a Lawsuit Against a Business Partner?

While it is technically possible for an owner to sue his or her business partner, this does not mean a lawsuit is always the best choice. Filing a lawsuit is adversarial and can make it very difficult for partners to continue working together. A lawsuit also has the potential to affect a company’s reputation and brand. An experienced business litigation attorney can help a business owner find alternatives to a lawsuit, which might include mediation or arbitration. These options tend to be more private, cheaper, and can lead to better outcomes than litigation. For example, partners may still be able to work with one another.

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