What constitutes a breach of an operating agreement?

A breach of an LLC operating agreement occurs when a member or manager violates any provision of the agreement. Common breaches include: fiduciary duty violations (self-dealing, usurping business opportunities, competing with the LLC), unauthorized distributions or loans to members, failure to perform agreed management duties, making decisions that exceed the member's authority, unauthorized admission of new members, failure to make required capital contributions, and misuse of company funds or assets. The severity of the breach determines your remedies - some breaches can be cured with a formal demand, while others constitute grounds for immediate expulsion or judicial dissolution.

What should I do if my LLC partner breaches the operating agreement?

Start with these steps in order: (1) Document the breach - gather evidence before the other party can conceal it. (2) Review your operating agreement for cure provisions, dispute resolution requirements, and remedies. (3) Send a formal written demand to cure the breach within the timeframe specified in the agreement. (4) If the agreement requires mediation or arbitration, initiate that process. (5) If cure fails, evaluate your options: forced buyout under agreement terms, negotiated separation, or judicial remedies. Do NOT make business decisions based on emotion. And do NOT discuss the breach with employees, customers, or vendors until you have legal counsel. The first 48 hours set the tone for everything that follows.

What happens when 50/50 LLC partners can't agree?

A 50/50 deadlock is one of the most dangerous situations in business law because neither partner can outvote the other. Resolution options depend on what your operating agreement says: (1) Shotgun clause - one partner names a price, the other must buy or sell at that price. (2) Mandatory mediation or arbitration - a neutral third party breaks the deadlock. (3) Swing vote mechanism - an independent third party casts the deciding vote. (4) Texas Shootout - both partners submit sealed bids, highest bid wins. (5) Judicial dissolution - a court orders the business dissolved if partners cannot agree. If your operating agreement has no deadlock provision, you're essentially at the mercy of voluntary negotiation or court intervention.

Can I remove my business partner from our LLC?

Only if your operating agreement has expulsion or forced buyout provisions. Most state LLC statutes do not allow involuntary removal of members without an agreement provision or court order. If your operating agreement includes expulsion triggers (breach of fiduciary duty, felony conviction, bankruptcy, material breach), you can follow the contractual process to remove the partner. If it doesn't, your options are: negotiating a voluntary buyout, petitioning a court for judicial dissolution, or filing an oppression claim if you're a minority member being harmed. This is why the operating agreement is so critical - without proper provisions, your hands are tied.

Do I need a lawyer for an operating agreement dispute?

Yes - and immediately. Operating agreement disputes escalate quickly because both parties have access to the same bank accounts, the same customers, and the same employees. A partner who feels cornered may start moving money, contacting clients, or making unilateral decisions. Your attorney needs to: review the operating agreement for your rights and remedies, secure evidence before it disappears, send formal breach notices that preserve your legal position, and evaluate whether the dispute should be resolved through negotiation, mediation, arbitration, or court action. Don't wait until money has been moved or customers have been contacted.

How much does it cost to resolve an operating agreement dispute?

Costs vary enormously depending on the resolution path. A negotiated buyout structured through mediation typically costs $25,000-$75,000 in legal fees total (both sides). Arbitration runs $50,000-$150,000. Full litigation can exceed $200,000 per side and take 1-3 years. The cheapest resolution is almost always a well-structured buyout where both partners agree to terms. The most expensive is a contested judicial dissolution where the court orders the business sold at auction. Alex Lubyansky handles buyout structuring with 15+ years of transaction experience and personal attention on every engagement.

Operating Agreement Disputes: What to Do When LLC Partners Disagree [2026]

The call I dread most isn't from someone buying or selling a company. It's from someone who just discovered their business partner has been transferring money to a personal account, signing contracts the other partner never approved, or making hiring decisions unilaterally. And when I ask "What does your operating agreement say?" - the answer is almost always the same: "I'm not sure. I think we signed something when we formed the LLC."

That document - the one nobody reads until the relationship breaks down - is the most important contract in your business. It determines who controls what, how disputes are resolved, and what happens when one partner wants out. If it's well-drafted, it saves the business. If it's a template from the internet, it probably buries you.

Why Operating Agreement Disputes Happen

In my experience, operating agreement disputes almost always trace back to one root cause: the partners didn't discuss the hard scenarios before they started the business. They agreed on the fun stuff - the company name, the logo, who does what - and skipped the uncomfortable conversations about money, control, and exit.

The Most Common Triggers

Unequal effort - One partner works 60 hours while the other works 20, but they split profits 50/50.

Financial disagreements - Distribution timing, reinvestment vs. payout, salary levels, personal expenses charged to the business.

Strategic direction - One partner wants to grow aggressively, the other wants to maximize distributions.

Outside business interests - A partner starts a competing venture or diverts opportunities to a side company.

Personal life changes - Divorce, illness, or retirement plans that change one partner's priorities.

Trust breakdown - Once trust erodes, every decision becomes a conflict. Small disagreements become existential battles.

What Your Operating Agreement Should Cover (and Probably Doesn't)

Most operating agreements I review in dispute situations are 5-10 page templates that cover formation basics and almost nothing about what happens when things go wrong. A proper operating agreement addresses the scenarios that nobody wants to think about:

Critical Provisions Often Missing

• Buyout provisions - How a departing partner's interest is purchased, at what price, and on what terms
• Valuation methodology - A predetermined formula or process to establish business value when a trigger event occurs
• Deadlock resolution - What happens when 50/50 partners can't agree on a material decision
• Capital call provisions - Whether members can be forced to contribute additional capital and what happens if they refuse
• Non-compete post-departure - Whether a departing member can compete with the company

Also Frequently Absent

• Death/disability/divorce clauses - What happens if a partner dies, becomes disabled, or gets divorced
• Distribution policy - When and how profits are distributed vs. reinvested
• Manager authority limits - Which decisions require unanimous consent vs. majority vs. manager discretion
• Transfer restrictions - Whether and how a member can sell or transfer their interest
• Dispute resolution - Whether disputes go to mediation, arbitration, or court

If your operating agreement doesn't cover these scenarios, you're essentially relying on your state's default LLC statute - which was written to be generic, not to protect your specific business. Default rules rarely align with what the partners actually intended.

What Constitutes a "Breach" of the Operating Agreement

Not every disagreement is a breach. A breach occurs when a member or manager violates a specific provision of the operating agreement or their fiduciary duties. Here are the categories I see most:

Fiduciary Duty Violations

Self-dealing transactions (buying company assets below market value), usurping business opportunities that belong to the LLC, competing with the company through a side venture, or failing to disclose material information to other members. These are the most serious breaches because they involve a member putting personal interests above the company.

Unauthorized Financial Actions

Making distributions without approval, taking loans against company assets, using company funds for personal expenses, issuing guarantees, or opening unauthorized lines of credit. If the operating agreement requires consent for financial decisions above a certain threshold, any action above that threshold without consent is a breach.

Exceeding Authority

Signing contracts that exceed the member's authority, hiring or firing key employees without required consent, admitting new members, or making strategic decisions (like selling a division or entering a new market) that the agreement reserves for unanimous or supermajority approval.

Failure to Perform

Abandoning management responsibilities, failing to make agreed capital contributions, consistently failing to attend required meetings, or refusing to approve routine business decisions (weaponizing veto power to create dysfunction).

Your Options When a Partner Breaches

Always try to resolve disputes before escalating. Litigation burns money on both sides. But you need to know your options - and your partner needs to know you know your options.

STEP 1

Formal Demand to Cure

Send a written notice identifying the specific breach and demanding cure within the timeframe specified in the agreement (typically 30-60 days). This is a legal prerequisite in most operating agreements before pursuing further remedies. It also creates a paper trail.

STEP 2

Mediation or Arbitration

Many operating agreements require mediation before arbitration or litigation. Mediation is a facilitated negotiation - non-binding, confidential, and significantly cheaper than court. Arbitration is binding and faster than litigation but still expensive. Check your agreement for mandatory dispute resolution provisions.

STEP 3

Forced Buyout Under Agreement Terms

If your agreement has buyout triggers (breach, deadlock, expulsion), exercise them. This is where a well-drafted partnership buyout agreement provision becomes invaluable - it gives you a contractual exit path without going to court.

STEP 4

Judicial Remedies (Last Resort)

If contractual remedies fail, you can petition a court for: judicial dissolution (forcing the LLC to wind down), appointment of a receiver (a neutral party manages the business during the dispute), an injunction (court order preventing specific harmful actions), or damages for breach. Judicial remedies are slow, expensive, and public. They're the nuclear option.

The First 48 Hours Matter

If your partner has breached your operating agreement, the moves you make right now set the trajectory for everything that follows. Get legal counsel before making any decisions.

Request Engagement Assessment

Deadlock Resolution: When You're 50/50 and Can't Agree

A 50/50 split feels fair when the partnership is working. When it isn't, it's a trap. Neither partner can outvote the other, and every decision becomes a standoff. Here are the mechanisms that break the impasse:

Shotgun Clause (Buy-Sell)

Partner A names a price. Partner B must either buy at that price or sell at that price. Because the offering partner doesn't know which side they'll end up on, they're incentivized to name a fair price. Fast, elegant, and usually fair.

Texas Shootout

Both partners submit sealed bids. The highest bidder buys the other partner's interest at their bid price. This prevents the gaming that can sometimes occur with a shotgun clause - both partners have incentive to bid their true value.

Swing Vote Mechanism

A pre-designated independent third party (often the company's accountant, attorney, or an industry advisor) casts the deciding vote on deadlocked decisions. This keeps the business operating while partners work toward resolution.

Mandatory Mediation

The agreement requires both partners to submit to mediation before pursuing any other remedy. A professional mediator can often find creative solutions that neither partner considered - restructured roles, partial buyouts, or new governance structures.

If your operating agreement has none of these provisions, a deadlock can only be resolved through voluntary negotiation or court intervention. I've handled disputes where a business divorce was the only way forward - and the entire process would have taken 90 days instead of 18 months if the operating agreement had included a single shotgun clause.

Protecting Yourself Going Forward

Whether you're currently in a dispute or want to prevent one, these steps will strengthen your position:

Annual Operating Agreement Review

Review your agreement every year. As the business changes, the agreement should evolve. What worked for a startup may not work for a $5M company.

Add Missing Provisions Now

If your agreement lacks buyout provisions, deadlock resolution, or valuation methodology - amend it now while relations are good. It's infinitely cheaper than litigating later.

Document Everything

Keep formal records of all major decisions, capital contributions, distributions, and material business discussions. In a dispute, whoever has better documentation wins.

Separate Personal and Business

Personal expenses through the business, informal loans between partners, handshake agreements - these create ammunition for the other side in a dispute. Keep everything formal.

How Acquisition Stars Approaches Operating Agreement Disputes

Operating agreement disputes sit at the intersection of corporate restructuring and M&A - because the resolution almost always involves restructuring ownership. Alex's approach prioritizes resolution over escalation:

Review your agreement and assess your position

What rights do you actually have? What remedies does the agreement provide? What's missing?

Negotiate resolution before escalation

Most disputes can be resolved through structured negotiation. A buyout is almost always better than litigation for both parties.

Structure the buyout if separation is inevitable

When the partnership can't be saved, Alex structures the purchase agreement and separation terms - efficiently and with personal attention on every detail.

Don't Wait for the Breach to Get Worse

Whether you need to review your operating agreement, respond to a breach, or negotiate a separation: contact Alex Lubyansky for a confidential assessment.