Can LLC Members Sue Each Other: Everything You Need to Know
Can LLC members sue each other? Yes, but there are some rules in place that govern exactly how and when this can happen.3 min read
Can LLC members sue each other? This is an important question to understand when choosing to enter into a business relationship with other individuals. The short answer is, yes, but there are some rules in place that govern exactly how and when this can happen.
What Is an LLC?
An LLC (limited liability company) is a business structure that has become increasingly popular in the United States business realm over the past several years. LLCs offer a flexible company structure with different management options, plus some legal and financial protection for members.
The owners of an LLC are called its members. These are similar to the shareholders or investors of a corporation. Even though the members of an LLC are fairly well-protected from creditors and liability issues, they do have the right to take legal action against one another for wrongdoing.
When Can LLC Members Sue Each Other?
When first forming an LLC, the members should draft an operating agreement. Here they should outline exactly how any members can take legal action against one another. A well-detailed LLC operating agreement will govern most disputes within the business and should help to keep such disputes from damaging the business.
If the operating agreement states that members can be held liable to one another for wrongdoing, then one member is able to bring suit against another. However, if it states that the members are not liable to each other, usually no legal action can be taken. If the members of an LLC choose to include such a provision in their operating agreement, they should be very sure that such legal action will never be necessary.
Some states have LLC regulations in place that can either trump an operating agreement or take the place of one if none exists. State regulations usually support the rights of LLC members to sue one another for good reason.
If an operating agreement doesn't explicitly state how and when legal action can take place between members and the state in which your LLC does business doesn't have any regulations on the matter, you can only bring suit if:
- You can prove that you have suffered harm apart from the business.
- You can prove that you have suffered harm apart from the other members.
These can be tough stipulations to prove, so it's better to have things clearly laid out in an operating agreement as soon as the business is up and running.
Regardless of any state and operating agreement requirements, taking suit against another, especially someone you do business with, is a big deal. The first thing you should do when considering legal action is consult a professional business attorney.
How Does the Corporate Veil Come Into Play?
The corporate veil refers to the liability protection afforded to the members of an LLC. This means that the company is a legal entity itself and, therefore, it can:
- Sue and be sued
- Own property
- Take out loans
- Be held liable
If a member of an LLC is injured somehow by the company, they can take suit against the LLC itself, rather than one or all of its members.
When Are Members Held Liable?
Sometimes, members can be liable for their decisions or actions as a part of the LLC. This is when the corporate veil is pierced. Some common ways that the corporate veil can be pierced include:
- Failure to keep personal and company assets separate
- Failure to make enough money to keep the LLC running and pay debts
- Failure to follow rules and regulations for business formation properly
- Fraud or any illegal business activities
- If a member personally co-signed on a loan for the business
The fiduciary duties owed to a business by its members refer to their expected loyalty to and care for the business. When entering into a business relationship with another, it is vital to have trust that all members of the LLC will act in the best interest of the company and not in their own best interest.
Member-managed LLCs require different duties of their managing members than their non-managing members. Such duties and responsibilities should be clearly outlined in the LLC's operating agreement.
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