A partnership with someone often starts with some level of trust. This might be money, responsibilities, customers, ideas, and long-term goals. However, when that relationship deteriorates, the dispute can easily escalate from a mere argument.
Your partner could begin using company cash for personal expenses, cover up financial matters, make unilateral decisions without your consent, steer customer business to a competing corporation, not pay out profits, and violate your partnership or operating agreement. This situation leads many owners to ask the same question: On what grounds can you sue a business partner?
No single answer fits all. Depending on the nature of your misconduct, such as whether it was one you committed personally or an act against the business. On a multitude of factors, from your agreements to state law to the structure of your LLCs and any appropriate agreements that govern them, then yes: Your rights may be affected.
However, business partner disputes can involve several legal claims, including breach of contract, breach of fiduciary duty, fraud, wrongful conversion of company property, and failure to provide an accounting.
This guide will cover the most common reasons a business partner might be sued, the strongest proof you can have for your claim, and what remedies may be available to you — and whether court life is worth its weight in gold or should be avoided at all costs.
Disclaimer: This article is for educational purposes and is not legal advice. For example, each state has its own partnership, limited liability company (LLC), and corporate laws that greatly affect how a business operates—so if someone is contemplating litigation, they should speak with an experienced business lawyer in the appropriate jurisdiction.
Can You Sue Your Business Partner?
Yes. In general, you can sue a business partner for breaching such an obligation when the breach causes legally recognized injury.
What really matters is not whether your partner acted unjustly. You usually need a valid basis in law to bring the claim.
As an example, say 2 people each own 50% of a company. And under their agreement, no owner can spend more than $25,000 without the other’s approval. One owner, for example, quietly takes $80K out of the business account to launch a side project.
The situation could be worse than bad business judgement. With the right facts and law to support it, it could bolster claims for breach of contract, breach of fiduciary duty, misappropriation of corporate opportunities or other causes of action.
The company’s structure also matters. Not all partnerships, limited partnerships, LLCs and corporations are subject to the same statutory or regulatory rules. According to the U.S. Small Business Administration, business structure affects ownership, personal liability, taxes, and other legal matters; requirements can vary by location.
If you are still losing track of how different structures affect ownership and liability, read Businesslineer to learn how to discover professional principles through the Oregon Business Registry. Businesslineer’s Oregon Business Registry guide
Breach of the Partnership or Operating Agreement
Breach of an enforceable contract is one of the clearest grounds to sue a business partner.
Often with a partnership agreement, an LLC operating agreement, shareholder agreement, buy-sell agreement, or another contract. These documents govern core elements such as ownership percentages, profit distributions, voting power, management responsibilities, capital contributions and withdrawals, and dispute resolution among members.
Operating agreements set out the company’s financial and operational rules and, once signed, the SBA usually treats them as a contract among members.
Imagine your agreement says profits will be divided quarterly in proportion to your ownership, with the assumption that partners will pay themselves and others out of those profits; if your partner unilaterally takes their portion while holding on to yours. For example, what if the agreement states that you need unanimous consent before incurring significant debt, but your partner by himself takes a large loan for business without consultation?
Those facts might back up a breach-of-contract claim. Typically, the person suing must prove an enforceable agreement, a duty owed by the partner, how the partner breached the obligation, and evidence of damages. Specific elements can vary by state law.
Review the entire agreement before bringing a lawsuit. Some contracts require negotiation, mediation, or arbitration before either partner can go to court. Others include buyout provisions or protocols specifically aimed at partner-disagreement scenarios.
Breach of Fiduciary Duty
Breach of fiduciary duty is another primary source of disputes between business partners.
A fiduciary duty normally imposes upon a party that has the natural ability to strengthen and/or influence another person or business legal duties owed by him/her/it. Duties owed in partnerships typically involve loyalty, care, conflicts of interest, partnership property, and disclosure, though the scope may be determined by state law or a governing agreement.
Partners generally cannot use partnership resources to derive personal benefit. According to legal guidance from Nolo, partners frequently owe fiduciary duties to both the partnership and other owners. Meanwhile, the American Bar Association warns that applicable state law can significantly affect fiduciary-duty claims and available damages.
Your partner takes an opportunity placed before the firm but profits personally, competes directly with the company while also being a member, conceals a conflict-of-interest situation, and/or uses property belonging to your business primarily for personal purposes; this could be a breach.
Imagine a construction business with two partners. A long-term client of one partner reveals that they want a $500,000 project. The partner forms a new firm and tells the client to go there instead of bringing the opportunity into the partnership, keeping all profits for himself.
That conduct could give rise to a fiduciary-duty claim, depending on the governing law and the agreement.
Misappropriation or Misuse of Business Money
Monetary issues are among the worst company conflicts. If one partner takes company funds, property, equipment, inventory, or other assets without the other partners’ consent for personal reasons, a lawsuit may be in order.
That could mean putting company funds into a personal bank account, paying personal credit-card bills with corporate money, selling off corporate property and pocketing the proceeds from its resale, or fabricating expenses to take cash.
Not every dubious expenditure immediately brings about a winning claim. Not all partners are at the same level when it comes to spending priorities. These include the partnership agreement, accounting practices, ownership structure, and the company’s history.
In these cases, evidence becomes essential. Bank statements, accounting records, payment processor reports, invoices, receipts, and tax records help confirm where the money went and whether the transaction was legitimately authorized; emails can only help confirm that.
If you suspect financial misconduct, preserving evidence early can often be more beneficial than confronting your spouse without proof.
Fraud or Intentional Misrepresentation
Fraud can also be another ground of legal action. A business partner commits fraud when they, to induce another to change position to his detriment: 1) purposely makes a material false representation; or 2) conceals information where they have a duty to disclose, and another person reasonably relies upon that conduct and is injured. The exact elements of the crime differ by jurisdiction.
This can happen before the partnership wells are drilled, right at the start of the process.
For example, you’ll be told to invest $150k as the company’s intellectual property really has (or does). It signed some big customers and has no debt—or little- and has managed to avoid it.
The business can also be defrauded when it is actively running. A partner could fake balance sheets, purchase fake invoices, hide debts or revenue, and ask for a larger stake from other owners.
Fraud allegations are serious and typically require compelling evidence. Written communications, contracts, financial statements, bank records, investor presentations, and records showing what the partner actually knew may become increasingly relevant.
Self-Dealing and Undisclosed Conflicts of Interest
Business Partners Often Engage in Transactions for their Own Self-Interest at the Expense of The Company.
This is often called self-dealing.
Let’s say your partner owns a supply company on the side and doesn’t tell you. They get your company to buy supplies from that business at well above market value without telling you. Your business goes into the red and your partner is laughing all the way to the bank courtesy of his supplier.
Another is when a partner obtains overpriced services from their relative’s company without disclosing the relationship and/or giving other bids a chance to compete.
Such conduct may also give rise to business-law remedies such as breach of fiduciary duty, breach of contract and fraud.
A partner’s disclosure of the conflict, obtaining any required approval, acting within their authority, and fair treatment are often the key issues.
Diverting Customers or Business Opportunities
A partner who covertly siphons customers, contracts, employees or opportunities from the business can cause substantial financial harm.
Say that you and your partner run a marketing agency together. Your partner starts telling your biggest customers to cancel their contracts with the agency and move to another company secretly owned by the partner.
Depending on the facts, these legal issues can include violations of duties such as fiduciary duty, contract law, misappropriation of trade secrets, and other claims.
However, competition rules can get complicated and become even more consequential after a partner leaves. Restrictive covenants, like noncompete and nonsolicitation clauses, vary greatly by state and are constantly evolving. Thus, in summary, it is critical not to assume that what is labelled as ordinary competition is automatically unlawful.
Failure to Provide Financial Records or Accounting
However, business owners require accurate information about the company they own.
Problems occur when one partner can review the books but continually refuses to explain income, expenses, distributions, debts, or transfers.
In more serious disputes, an owner may pursue an accounting (a legal or equitable remedy that seeks to determine what happened to business assets and how much money, if any, is owed).
Courts have long recognized accounting as a traditional remedy in partnership disputes with complex financial relationships.
The ability to demand an accounting is particularly useful when you are dealing with disreputable conduct and cannot ascertain the total loss because the other partner controls the books.
Your company’s accounting may show $900,000 in yearly sales, but only $500,000 may be traceable across the accounts you can track. To sort out the dispute, you may need access to full financial records if your partner will not explain the discrepancy.
Removing A Partner From Management Or Profits
Even when the relationship between business co-owners has soured, an owner does not have the right to unilaterally drive the other owner from the business…
How your rights are defined depends on the nature of the entity, the ownership agreement, and state law. Yet legal complications arise when a partner wrongfully locks out another owner from business accounts, prevents access to records, stops legally required distributions, takes away management authority without cause or negotiation, and tries to compel sole control of company resources.
Such disputes are particularly difficult for owners if the ownership is split 50/50, as one owner may not have enough voting power to break a tie on their own.
Litigation, in such a scenario, may be to enforce contractual rights, but also for damages, demand access to records or information from other members/shareholders of the Establishment, including through judicial dissolution proceedings and any other claims available under applicable law.
A Business Standoff Becomes a Legal Problem
Not all partnership lawsuits involve embezzlement and fraud.
Sometimes, two owners reach a crossroads where they can no longer run the business as partners.
Two equal owners might never agree on hiring, financing, expansion, pay—or even whether to sell the company. Important business decisions might be rendered impossible without a tie-breaking authority.
Serious deadlock can lead to judicial dissolution or another court-supervised remedy, depending on the entity and state.
However, dissolution should not be a tabula rasa decision. Sometimes a negotiated buyout offers more value to both parties, as long as the business is profitable.
What Evidence Do You Need Before Suing a Business Partner?
A strong suspicion is not the same as strong evidence.
Before taking legal action, organize the records showing what occurred, what obligation your partner violated, and how the conduct harmed you or the business.
Useful evidence can include:
- Partnership agreements, operating agreements, amendments, and buy-sell agreements
- Bank statements, bookkeeping records, tax documents, invoices, and receipts
- Emails, letters, messages, and meeting notes
- Contracts with customers, vendors, lenders, or investors
- Records showing ownership percentages and capital contributions
- Evidence showing lost profits, missing funds, or diverted opportunities
Do not alter records or improperly access accounts you have no legal authority to enter. A lawyer can help determine how to preserve and obtain evidence.
Does the business itself have a claim?
This is an incredibly important question, but one many businesses, particularly small/medium-sized ones, overlook.
Other times, the partner’s sin —what they do—affects you in a very personal way. In other scenarios, the company sustains the main damage.
If your partner fails a contract that says they must pay you directly for what you own, then you might have a personal claim.
However, if your partner withdraws $100,000 from a corporation’s bank account, the initial harm may be to the corporation and not directly to an individual shareholder. Depending on the entity and state law, you will likely need to pursue the case as a derivative action on behalf of the entity.
The American Bar Association notes that the distinction between direct and derivative claims matters because it determines whether a lawsuit can be brought in the owner’s name.
This distinction is one of several reasons that owners should seek legal advice before proceeding with a complaint.
What Actions Might You Seek From The Court?
Monetary damages can only be one remedy. The types of damages will depend on the specific claim and relevant law. They could include compensation for lost revenue or profits, reimbursement/remediation of misappropriated funds, restitution of profits gained from unlawful conduct, accounting, injunctive relief to curb harmful activity, enforcement of contractual rights, or dissolution of the business.
According to the American Bar Association, remedies that may arise in fiduciary-duty litigation include damages, injunctions, accounting, receivership and reformation, and constructive trusts, but availability varies by jurisdiction and circumstances.
The court may also consider ownership rights or dissolution and winding-up of a partnership when the legal requirements are met.
Some preferred outcome is thus what you should have in mind before litigation even begins. A strategy to preserve a profitable company is different from one that must intervene immediately to divest entirely.
Should You Sue Immediately?
Filing a lawsuit is sometimes the only option, especially when assets are disappearing, records are being destroyed, customers are being diverted, or you need immediate relief from the Court.
Litigation can also be costly, dislocative, and slow.
Before filing, review the governing agreement and see whether a solution exists through negotiation, mediation, arbitration, or buyouts.
An obvious initial step is to determine what this actually amounts to.
For example, if the controversy is for $20,000 but full litigation would cost far more. A negotiated settlement makes economic sense. In contrast, if your partner is moving away hundreds of thousands of dollars and all the main customers and threatening the very survival ofthe company to do so, you might be even more justified in taking strong legal action.
The more aggressive option is not always the best strategy. It preserves your ownership rights and produces the best practical business resolution.
Frequently Asked Questions About Suing a Business Partner
Can I sue my business partner for taking money?
Potentially, yes. If a partner takes company money without authorization or uses it for personal purposes, the conduct may support claims such as breach of fiduciary duty, breach of contract, conversion, fraud, or other causes of action depending on state law and the facts.
Can I sue a business partner for making bad decisions?
Usually, a bad decision by itself is not enough. Business owners sometimes make reasonable decisions that later lose money. A stronger case normally involves violation of an agreement, legal duty, or other actionable misconduct.
Can I sue my partner without a written partnership agreement?
Possibly. A written agreement makes rights easier to establish, but partnerships can sometimes exist without formal written agreements. State partnership law and evidence showing the parties’ relationship can become particularly important.
What happens if my partner refuses to show me the books?
Depending on your ownership rights and state law, you may have rights to company information or records. In an appropriate dispute, you may be able to seek an accounting or other court remedy.
Can I force my business partner to buy me out?
Not automatically. A buyout right may arise from the partnership agreement, operating agreement, state statute, settlement negotiations, or a particular legal proceeding. The answer depends heavily on your business structure and governing documents.
Can I sue my partner and keep the business operating?
Yes, in some circumstances. A lawsuit does not always require the business to close. A court may award damages or other relief while the company continues operating. In other cases, the relationship may be so damaged that a buyout or dissolution becomes more practical.
How long do I have to sue a business partner?
Every state has statutes of limitations that restrict how long a person has to bring different kinds of legal claims. The deadline can vary by claim type and by when the misconduct was discovered or should have been discovered. Because missing a deadline can prevent recovery, review potential claims promptly with a lawyer.
What to Do Next If the Partnership Has Broken Down
Treat a serious partner dispute as both a legal and business problem.
Start by gathering your agreements and financial records. Identify exactly what your partner did, when it happened, which contractual or legal obligation may have been violated, and how much damage resulted.
Avoid making accusations you cannot support or taking retaliatory actions that could create new legal problems. Instead, preserve evidence, review the partnership or operating agreement, and determine whether the harm belongs to you personally, the business, or both.
Most importantly, decide what outcome you actually want. You may want repayment, access to company records, removal of harmful conduct, a negotiated buyout, control of the company, or complete dissolution.
Once that goal is clear, a business litigation attorney can evaluate the agreement, entity structure, state law, possible claims, deadlines, and potential remedies.
Suing a business partner is a major decision. Still, when another owner breaches an agreement, abuses their position of trust, misuses company assets, commits fraud, or seriously damages the business, legal action can be an important way to protect your investment and the company’s future.
