What Happens if You Breach an LLC Operating Agreement?

A limited liability company, or LLC, is usually governed by an operating agreement. Most states do not require that LLCs create operating agreements, but if one is created, it generally stipulates how the company is run. If a member is found to breach an LLC operating agreement, he can be sued and, if found guilty, penalized by fines.

New York requires a written operating agreement be created for all LLCs. Several other states require LLCs to create a written or oral operating agreement in specific situations. For instance, New Mexico does not require an operating agreement; however, for an operating agreement in the state to be valid, it must be in writing. Similarly, Alabama does not require an operating agreement unless the LLC has only one member.

Each state has its own set of laws governing how an LLC is to be run. Oftentimes, an operating agreement can supersede the laws of the state. Therefore, even though an operating agreement is not required in most states, many LLCs create a written operating agreement so that they are not subject to default state law. Written operating agreements are also helpful in case members of an LLC try to breach the operating agreement; a written copy of the agreement that contains all members' signatures may be useful in pursuing a breach of contract lawsuit.

An operating agreement is a contract. Therefore, individuals who breach an operating agreement can be prosecuted for breach of contract and may be subject to the penalties specified by the state if found guilty. An individual can be sued for failing to perform as agreed upon in the operating agreement or for making it difficult for another party or parties to perform. An individual can be found in breach of contract in whole or in part; in other words, if all parts of the contract were breached, or just specific points.

Read More: Elements of a Breach of Contract

Each state has different penalties for individuals who are found guilty of breach of contract. In most cases, the case will be brought to small claims court if the damages the LLC requests are within the jurisdictional amounts stipulated by the court, usually between $1,500 and $15,000, according to the All Business website. A small claims case is procedurally simple, and many LLCs find it unnecessary to retain an attorney for the hearing. A case may be heard in civil court by trial if damages are in amounts higher than those allowed by an LLC's jurisdictional small claims court. This can be a costly process and usually requires an attorney for both parties, mainly because attorneys are familiar with the procedural protocols of the civil trial court.

A hearing will be held during a small claims court case. At its conclusion, a judgment will either require the defendant to pay damages or find the defendant not guilty of breach of contract. In a trial case, remedies for breach of contract may include payment of damages, or if damages are inadequate, a court order compelling the defendant to complete the actions assigned to him in the contract. Cancellation of the contract and restitution, or paying enough to put the LLC where it would have been had the breach not occurred, are also common remedies available for an LLC that has experienced breach of operating agreement.