When a Business Partner Breaches Your Operating Agreement

The operating agreement is the constitution of a limited liability company. It defines how the business is run, how decisions are made, how money is distributed, and what happens when the owners disagree or one of them wants out. When a co-owner ignores or breaches that agreement, the stakes are high, because unlike a dispute with an outside party, this is a fight with someone who holds an ownership stake, knows the business intimately, and may share control of its accounts. How you respond in the early days often determines whether you end up protecting your position or undermining it.

The operating agreement comes first

Almost every question in this kind of dispute begins with the operating agreement itself. Before considering the statute or the courts, the agreement usually supplies the answer, or at least the framework, because Michigan law lets the owners set their own rules in that document on most matters. Common breaches include a partner taking unauthorized actions the agreement required a vote for, withholding distributions the agreement mandates, refusing to contribute capital they committed to, diverting company opportunities to themselves, or freezing another owner out of management they were entitled to participate in.

The agreement typically spells out what happens in these situations: notice and cure provisions, buy-sell mechanisms, dispute-resolution requirements, and the consequences of a default. Reading it carefully is not a formality. It is the first substantive step, and it often reveals both the strength of your position and the path to a resolution.

What the statute adds

Where the operating agreement is silent or incomplete, Michigan's Limited Liability Company Act supplies default rules and additional protections. The statute governs members' rights to information, the duties owners and managers owe the company and each other, and the remedies available when those duties are breached, including the powerful protection against oppressive conduct by those in control. Even a well-drafted agreement operates against this statutory backdrop, and some protections, like the remedy for member oppression, come from the law itself rather than the contract.

Your remedies

The right response depends on the breach and on what the agreement provides, but the available tools generally fall into a familiar set.

• Demand and cure. Many agreements require you to give notice of the breach and an opportunity to fix it before pursuing more. This step also builds your record.
• Injunctive relief. When the breach threatens immediate, hard-to-undo harm, such as a partner draining accounts or diverting business, a court can order it stopped while the dispute is resolved.
• Breach of contract. You can sue for breach of the operating agreement itself and recover the damages the breach caused.
• Breach of fiduciary duty. Owners and managers owe duties to the company and often to each other, and conduct that breaches those duties can support a separate claim.
• Buyout or separation. Frequently the real goal is to end the ownership relationship, and the agreement's buy-sell terms, or a negotiated buyout, provide the exit.

A worked example

Two people own a West Michigan company through an LLC, and the operating agreement requires unanimous consent for any distribution and for major contracts. One owner, without the other's agreement, begins paying himself distributions and signs a significant supply contract on his own. The other owner reads the agreement and sees clear breaches: distributions and major contracts both required her consent. Rather than reacting in anger, she documents the unauthorized actions, sends a formal notice invoking the agreement's cure provision, and preserves the financial records showing what happened. That measured approach puts her in a strong position, whether the matter resolves through a negotiated buyout or proceeds to court, and it often surfaces the deeper problem that a breach is really the opening move in a freeze-out, which is the subject of our guide on minority shareholder oppression in Michigan.

Where owners go wrong

The most common and damaging mistake is reacting emotionally, taking retaliatory action, locking the other owner out, seizing company funds, or making unilateral moves that mirror the very breach you are complaining about. That kind of response often puts you in breach too and hands the other side a defense. The second mistake is failing to document, because an ownership dispute is won on the record, and the owner who quietly preserves the evidence is far stronger than the one who did not. The third is waiting too long, allowing the breaching partner to entrench their position while the value of the business erodes.

Do not take self-help steps that put you in breach of the same agreement. If a partner is draining accounts or diverting business, the answer is a court order, not a race to do the same. Preserve your clean hands.

Moving deliberately

The through-line in every operating-agreement dispute is the value of acting deliberately from a documented position. Read the agreement, preserve the record, take no step that compromises your own standing, and get advice before you move. Whether the endgame is a negotiated buyout or litigation, the owner who started carefully holds the leverage. Our partnership and shareholder dispute practice guides owners through exactly this, and the broader question of whether to press the fight or settle it is one we address in our framework on litigating versus settling.