Common Sources of Business Disputes and Partnership Litigation

One of the most popular business structures today is the limited liability company (or LLC). It offers both legal and tax benefits that make it appealing for businesses of all sizes but particularly for small businesses. While the ease of formation and laxness of formalities can be viewed as some of the best features of a limited liability company, they can also be the greatest source of legal disputes. Some of the most common sources of business litigation involve disagreements over whether a company’s operating agreement permits a particular action to be taken on behalf of the business, who is authorized to make business decisions, or what duties each member of an LLC owe to each other. In recent years, the Illinois legislature has attempted to prevent or reduce the number of lawsuits involving these common sources of litigation through clarification and amendment of the Illinois Limited Liability Company Act, 805 ILCS 180/1 et seq.

No amount of amendment will ever prevent all disputes and business divorces are bound to happen. For this reason, it is highly advisable to involve a business attorney at the outset of the formation to ensure that a company gets off to the right start and has all governing documentation in place. In the unfortunate, yet not at all uncommon, event of business litigation, a highly experienced business can mean all the difference in the outcome—and expense—of the dispute by knowing what evidence will be crucial to proving your side of the dispute and common sources of such evidence.

Operating Agreement? What Operating Agreement?

Many business disputes are a consequence of not having a written operating agreement—or of having a poorly drafted one. Although LLCs in Illinois are not required by law to file an operating agreement with the state, it is still highly recommended that they create one. An operating agreement delineates the operational procedures and policies of a company. By having a written operating agreement, the members in a dispute can point to the operating agreement as evidence of their intent at the outset of the company on how to handle a particular issue. In addition, an operating agreement can detail certain common aspects of a business to avoid or help resolve disputes among partners including:

• Management type of the business (i.e. whether it will be member-managed or manager-managed);
• Who the manager is, if any;
• The scope of the managing member’s authority;
• When and how members receive compensation;
• When and how the business distributes profits to members;
• Whether any member will be an employee

In the absence of a written operating agreement, the Illinois LLC Act allows for an oral or implied operating agreement to govern a company. This can be a very expensive issue to litigate, however. An experienced business dispute attorney though can help and will know what types of evidence will be required to prove the existence and contents of an implied or oral operating agreement.

Member Managed or Manager-Managed?

Another common source of business disputes is a lack of clarity involving who is authorized to make decisions for the business and to what extent. Illinois law recognizes two different management structures for an LLC: member-managed and manager-managed. Under the Illinois LLC Act, the default management structure is member-managed, which the members can change to manager-managed by specifying as much in the operating agreement.

Who Owes What Duties to Whom?

As a default, with few exceptions, members of an LLC owe fiduciary duties of care, loyalty, and to avoid self-dealing. The Illinois LLC Act allows members to eliminate or reduce the fiduciary duties they owe via the operating agreement. To do so, however, requires the operating agreement to unambiguously provide for the elimination or reduction of these fiduciary duties, though the duty of care cannot be waived or reduced. In a business dispute lawsuit, a member being accused of breaching his fiduciary duties will need to first determine the extent to which such he owed the duty and then will have to prove that his actions did not breach that fiduciary duty.

Super Lawyers named Illinois commercial law trial attorney, Peter Lubin, a Super Lawyer and Illinois business dispute attorney, Patrick Austermuehle, a Rising Star in the Categories of Class Action, Business Litigation, and Consumer Rights Litigation. Lubin Austermuehle’s Illinois business trial lawyers have over thirty years of experience in litigating complex class action, copyright, non-compete agreement, trademark and libel suits, consumer rights and many different types of business and commercial litigation disputes. Our Brookfield and Clarendon Hills business dispute, partnership litigation, and civil litigation lawyers handle emergency business lawsuits involving fiduciary duties, business valuations, self-dealing, trademarks, injunctions, and TROS, covenant not to compete, franchise, distributor and dealer wrongful termination and trade secret lawsuits and many different kinds of business disputes involving shareholders, partnerships, closely held businesses and employee breaches of fiduciary duty. We also assist Chicago and Oak Brook area businesses and business owners who are victims of fraud. You can contact us by calling 630-333-0333. You can also contact us online here.