Can I Sue My Business Partner For Not Working?

When a business partner is not working, look to the partnership agreement to determine if the lazy partner has a contractual duty to work. If the lazy partner has a contractual obligation to work, you may sue the lazy partner for breach of contract.

Grounds For Suing A Business Partner Who Is Not Working, Example

When partners come together to start a new business, excitement fills the air. So when Skip and Chuck started a new coffee shop in Irvine, California, they brought a passion for espresso, baked goods, and small business ventures. The two old university friends knew they were taking a chance, but they also felt prepared to deal with adversity. Chuck and Skip had each been involved in successful startups before, and they assumed they had the same goals regarding the success of Fresh Beans Café.

However, neither Chuck nor Skip were ready for the stressful decisions that went into starting the new small business, especially because Fresh Beans endured a rocky start. Skip and Chuck’s new shop struggled with competition from other neighborhood coffee shops with established reputations, as well as some poor ordering choices. One morning, Fresh Beans ran out of coffee and muffins, as a line formed at the door and their employees struggled to keep up. Although the shop recovered, both Skip and Chuck knew that Fresh Beans was losing money quickly.

At this point, Skip and Chuck grew apart. While Chuck tried his best to save the business, Skip began to disappear. Chuck began to suspect that Skip was defaulting on their partnership agreement and stealing money from the business. His suspicions were confirmed as Chuck checked Fresh Beans’ sales receipts and monitored the company’s accounts. Chuck also realized that Skip had maxed out all of the shop’s credit accounts.

Realistically, some business relationships fall apart. Running any business can be extremely rewarding, but it is also a stressful and difficult endeavor for everyone involved. When a business partnership falls apart, what happens? What should the other partner do in response when a company partner engages in harmful conduct?

Chuck knows he must do something about Skip’s actions, but he is unsure what his options are. Fresh Beans, an LLC, ties Chuck to Skip, and he is unsure how to free himself and whether he can sue his business partner. Besides, what could Chuck sue Skip for?

The situation at Fresh Beans is unfortunate, but businesses fall apart daily based on their partners’ negligent actions. However, when one partner simply stops working or engages in harmful actions, the other partner or partners have a path to recourse. The aggrieved partner has rights under the law when a business dispute occurs. In some situations, one business partner can legally sue the other. For example, if Chuck can prove that Skip is stealing money from the business and, therefore, from Chuck, then Chuck can sue to Skip to collect damages.

Many business partners have questions about their rights and ability to sue their partners for various reasons. This article will answer these questions and more as we briefly outline the valid reasons for lawsuits among business partners.

What Rights Do Business Partners Have?

Business partners possess legal rights, depending on the situation. Let’s look at the most common partnership to understand these rights and when one business partner can and should sue the other.

General Partnerships

General partnerships are the most common form of partnerships. Owners form general partnerships when they come together to run a for-profit company.

Usually, both partners have an equal share in the company’s profits and losses. Additionally, both partners assume financial liability for the partnership’s debts, just as the business’ profits reward them.

Sometimes, business partners reach a point when they desire to sue their partner for their share of the company’s liability. Often, partners begin their business journeys with similar goals, but their visions for the company begin to differ, and their actions support their visions. Some company partners consider suing their counterparts when business relationships erode to no return.

However, it does not always make sense to sue one’s business partner, and business partners should not consider a quick lawsuit as the obvious answer to a dispute. When a partnership falls apart, sometimes the owners can solve the problem without legal action. Honest dialogue is one way that business partners find they can persevere through tension and arguments.

For example, Zach and Lee run a hot dog stand called Surf N’ Dogs in Venice Beach. After a year of an excellent business, competition and a health food craze lead to lower sales, and the relationship between the partners begins to suffer. Zach and Lee blame each other for their suffering LLC, and neither partner wants to work at the stand for their scheduled hours. Once, Zach arrives at Surf N Dogs on a sunny day to find a line forming, but Lee is nowhere to be found.

Instead of pursuing legal action because Lee isn’t working his shifts, the two partners sit down and have an honest discussion. As a result, they come up with new strategies for the business and even a new menu. Importantly, they also decide to work diligently for one more year and then make an executive decision regarding continuing or closing the business.

A year later, Surf N’ Dogs is doing better business than ever, based on Lee and Zach’s important conversation and the goals they set.

Sometimes, when partners disagree, the situation does not require legal action. However, sometimes litigation is not only an option but completely necessary to defend one partner’s rights and possibly save the business and the partner’s livelihood.

Can You Sue Your Business Partner?

You can sue your business partner under these four most common reasons:

Abandonment

Many business partners ask: can I sue my partner for abandoning the business?

Abandonment occurs when one partner takes leave of the company before it is properly dissolved or “wound up.” Usually, a partnership agreement covers the proper dissolution of the business in the partnership agreement. However, if one partner violates the agreement by abruptly leaving the business, the other partner may have the right to sue their partner to enforce their rights.

Sometimes, one partner decides to simply leave a struggling business, and the other partner is left to pick up the pieces. Abandonment can saddle the “staying” partner with debt, liabilities, and a long list of tasks to take care of with no help whatsoever. In addition, abandonment may be considered an illegal action and can prompt a lawsuit.

If abandonment occurs, we suggest contacting an experienced attorney. Sitting down and speaking with a lawyer helps the partner determine their legal options and where to go. Remember, business partners have rights under the partnership agreement they signed and the law.

Negligence

When a business partnership runs into trouble, negligence is sometimes the culprit. Negligence is defined as a failure to act properly when doing something. In business partnerships, negligence occurs when one partner does not make reasonable decisions or take reasonable actions. Negligent actions can assume many different forms and can rapidly ruin a business. Therefore, when negligence occurs, the partners who notice or are directly impacted must act quickly.

When a partner begins acting unreasonably and jeopardizing the business, it makes sense to contact an experienced business dispute lawyer. However, if partners are trying to decide whether or not they have a valid negligence claim, these questions will help.

Did the business partner fail to act as a sensible, reasonable individual would when faced with the same circumstances?
Did the business partner’s actions harm the company in some manner?

If the answer to these questions is affirmative, and the partner can prove these acts occurred, the injured partner can sue the negligent partner for their actions. When business partners start a company together, they must behave responsibly, make proper decisions, and consider the impact of their actions on the business.

For example, Sasha and Gwen run a Sea U Pose yoga studio in Encinitas, California. When a business starts to suffer, Gwen, who is in charge of the company’s finances, struggles to pay the incoming credit card bills. Gwen begins hiding the bills from Sasha and refusing to pay them while claiming that everything is going fine for Sea U Pose financially. As a result, the studio wracks up debt, and their credit rating—and that of the owners—plummets.

When Sasha ultimately finds out about Gwen’s actions, she decides to sue Gwen for negligence. Sasha hopes that her lawyer will be able to help her collect damages and extricate herself from Sasha’s harmful actions, as well as the business.

Breach of Partnership Agreement

As they form their companies, business partners use partnership agreements to define roles and obligations and get the obligations of each partner down on paper. Partnership agreements also depict the partners’ duties and responsibilities, which the business can enforce when needed.

When a business possesses a legitimate partnership agreement, the partners are bound to the agreement and must act in agreement with it. Based on this, if one partner violates one of the terms of the agreement, then the other partner can claim that the agreement has been violated and take legal action. Legal action is justified because of the evidence contained in the partnership agreement.

For example, Rob and Mike own a skateboard shop in Sacramento, California. When they started RM Skates, they, along with their attorneys, created a detailed partnership agreement. One of the clauses in the partnership agreement focuses on dissolution, and both partners added specific provisions. Both partners must mutually agree upon the dissolution of RM Skates, and once they dissolve the business, neither partner will be responsible for the other’s liabilities or debts.

However, when RM Skates begins to lose business, Rob leaves the business and disappears, saddling Mike with the shop debts and Rob’s debts. Mike is nervous, but his consultation with an attorney helps him realize that the partnership agreement still binds Rob and that Mike will not legally have to assume Rob’s debts. Also, Rob’s abrupt departure violates one of the dissolution clauses.

Breach of Fiduciary Duty

In a business partnership, fiduciary duty essentially means that an individual must act in a way that benefits someone else. In this case, the other individual is the other partner, and these actions normally have financial implications in partnerships. The individual tasked with the duty is often known as the fiduciary, and the other party is the beneficiary or the principal.

In partnerships, the fiduciary duty is to act positively for the partnership. Plus, the fiduciary is supposed to place the interests of the business above their interests. Therefore, when someone violates their fiduciary duty, they also usually violate the original partnership agreement.

However, what if there is no partnership agreement? Many business partners wonder if they can sue their partners for a breach of fiduciary duty without supporting a partnership agreement. The answer is that they can prove that their partner has held their interests over the partnership’s interests.

For example, Holly and Jess run a bakery called Cakes and Shakes in Los Angeles, California. The pair made a tidy profit for a few years, but then the recession hurt the sales of their baked goods. At this point, Holly, a jewelry designer, begins using the bakery to sell her products. Holly stops working the register and helping customers and instead sets up a table on the street where she sells her craft jewelry for cash profits. Meanwhile, Jess is in the kitchen making cookies as customers wait in line or simply leave, and Cakes and Shakes completely fall apart.

Because Holly acts wholly for herself and not on behalf of the business, she breaches her fiduciary duty. Ultimately, Jess sues Holly for the profits they lost out on when Holly was running the store.

Are Members of a Limited Liability Company Sue Able to Sue Each Other?

A popular business structure option, Limited Liability Companies (LLCs) are organized differently than general partnerships. General partnerships are created based on a partnership agreement, and the agreement helps partners govern the business efficiently.

However, the partners in an LLC govern the business based not on a partnership agreement but an operating agreement. An LLC’s operating agreement governs the company and dictates the actions of the owners.

The operating agreement of an LLC sometimes establishes how and when members can sue other members. However, some LLC operating agreements do the opposite and dictate that the business members cannot take legal action against each other. Instead, the agreement might offer alternate methods to resolve disputes, such as mediation or arbitration.

For example, Saul and Sam have run a lumber business in Lake Tahoe, California, for over a decade. After a particularly rough year of business, Saul and Sam are butting heads over financial issues. Saul doesn’t approve of how Sam recruits clients, and Sam thinks Saul doesn’t work hard enough.

When Sam contacts an attorney, convinced that Saul has given up on the business, the attorney advises that before he begins a lawsuit, he checks the details of the operating agreement. Sure enough, when Saul and Sam started the business years ago, they inserted a clause that prevented either partner from taking legal action against the other.

Instead, Sam and Saul willingly go through arbitration, and the presence of the arbitrator allows both men to speak their minds. Sam and Saul also enjoy listening to each other, a habit they realize they have lost over the years. As a result, Sam and Saul solve their problems and return to work, and they have a great next year in the lumber business.

LLCs feature operating agreements instead of partnership agreements, so before owners take legal action, they should refer back to their initial company agreement. The agreement should provide direction and instruction regarding what actions to take to settle the present dispute.

What to do if business partner is not working?

After negotiating with the business partner who is not working and no positive results come from it, contact a partnership dispute lawyer to help resolve the dispute. When two or more individuals create a business, they do not expect things to fall apart. Likewise, at the outset, business partners are usually excited about their new venture and do not want to imagine being forced to take legal action against another partner.

However, personal problems and work-based complications often arise in the business world. Sometimes people’s egos get the best of them, or they cannot admit that their business is suffering and needs help.

It is vital for all business partners across all industries to understand their legal options if problems surface. There is nothing worse than being unprepared when faced with, for example, a partner who decides to act negligently or breach an agreement.

Knowledge is power, and we want our clients to understand their rights when their partners do not have their best interests in mind. At Nakase Wade, we have represented numerous businesses and individuals seeking to take legal action against their partners. Our business lawyers and corporate attorneys are skilled, experienced, and professional, and we will listen to the facts of the situation and explain your rights.

If you have questions about a business partner who is not working, or is involved in other nefarious activities, get in touch with our California business attorneys. We offer free consultations and are excited to get to work helping you get back on track with your business goals.

Do not let a business partner’s errant actions damage your business or disrupt your life. Contact Nakase Wade today—we look forward to hearing from you.

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