The Partner Who Runs Everything

Suppose Abby and Bob each own half of an Illinois LLC that holds four commercial buildings. Bob runs the buildings day to day through a property management company he owns separately. Abby has a full-time job elsewhere and trusts him. The LLC’s operating agreement says any commitment over $100,000 needs both of them to approve it.

Then Abby hires a new accountant, who finds three problems:

• An extra fee. For ten years, Bob’s management company has charged the LLC a $1,500 monthly “administrative fee” that its management agreement doesn’t mention.

• A relative’s contractor. The LLC’s repair work has gone to a contractor owned by Bob’s brother-in-law.

• A big contract Abby never approved. Bob just signed a $450,000 renovation contract for the LLC and paid a $200,000 deposit, without asking her.

When Abby asks, Bob says the fee is customary, nobody objected for ten years, and the building needed the work.

A Bad Business Decision Isn’t Necessarily a Breach

Owners are allowed to take risks, and losing money on a reasonable bet isn’t misconduct. Under Section 15-3 of the Illinois LLC Act, a member’s or manager’s duty of care is generally limited to avoiding grossly negligent or reckless conduct, intentional misconduct, and knowing violations of law. Bob’s renovation may well have been a sound idea.

But a co-owner who ignores a consent requirement in the operating agreement has a problem whether the investment succeeds or not. The question is whether Bob can make the decision alone, when the operating agreement says he couldn’t.

What Did the Agreements Allow?

The management agreement between the LLC and Bob’s company, along with any amendments, fee schedules, approved budgets, and invoices, shows what Bob’s company was entitled to charge.

Suppose it provides a fixed monthly fee plus actual property expenses. A $1,500 extra fee for ten years is $180,000 the agreement doesn’t mention.

Bob will likely argue that the LLC approved the fee by paying it, or that ten years of payments changed the deal. But paying a bill isn’t the same as knowingly approving a charge that was never explained, especially one buried in a monthly statement.

Related Party Payments Get Closer Scrutiny

Hiring Bob’s brother-in-law isn’t automatically improper—the work may have been done at fair prices, and the relationship may have been disclosed and approved. But Illinois law imposes a duty of loyalty that includes accounting to the LLC for any benefit taken from its business and refraining from dealing with the LLC on behalf of someone with an adverse interest. Bob wears two hats here: he is a co-owner running the LLC, and he owns the company the LLC pays to manage its buildings. An agent that secretly profits from its position may have to give up those profits, and sometimes its fees, on top of repaying the LLC’s losses.

The useful work is tracing each questionable payment: who received it, what invoice supported it, whether the work was done, who approved it, and whether competing bids would have come in lower.

The Contractor May Still Hold the LLC to the Deal

Bob’s breach of the operating agreement doesn’t necessarily cancel the renovation contract. If the LLC had held Bob out as authorized to sign, or the contractor reasonably believed he was, the LLC may still be bound under the doctrine of apparent authority. The answer depends on what the contractor was told, what documents it saw, and how the LLC had dealt with outsiders before. The first step is to find out exactly what commitments he has made (e.g., signed contracts, nonrefundable deposits, and any personal guarantees). Some commitments can be unwound by agreement, though others can’t.

Getting the Records

Under 805 ILCS 180/10-15, Abby can demand information about the LLC’s business and finances that is material to her interest. Many management agreements also give the owner audit or inspection rights, sometimes with deadlines for objecting to statements. A targeted review usually works better than demanding ten years of documents at once—start with unexplained recurring fees, related party vendors, and unusually large payments, and expand once a pattern appears. Abby should secure the LLC’s own records and accounting access before raising the issue with Bob.

How Far Back Recovery Can Reach

Finding the problem now doesn’t mean every charge can be recovered. Claims on written contracts generally must be brought within ten years under 735 ILCS 5/13-206; many other claims have five years under 735 ILCS 5/13-205.

However, if the wrongdoing was fraudulently concealed, 735 ILCS 5/13-215 may allow suit within five years after discovery. This requires actual concealment, not just late discovery; a charge plainly listed on a monthly statement may be hard to call concealed. A transaction-by-transaction schedule of dates, contract terms, evidence, and discovery separates recoverable losses from charges that are too old.

Who Brings the Claim

Because the money belonged to the LLC, not to Abby personally, her claim may have to be brought on the LLC’s behalf as a derivative claim. That affects who controls the case and who receives any recovery: money recovered goes back to the LLC. The remedies may include enforcing the operating agreement, recovering the extra fees and any secret profits, limiting Bob’s authority going forward, or a negotiated separation.

Ten years of trust explains why Abby never checked; but it doesn’t change what the agreements allowed.

If a co-owner or manager has spent company money without authority, or charged fees the agreements don’t support, we can help you review the records and your recovery options. Contact us to discuss your matter.

This article provides general information about Illinois law and does not constitute legal advice. Rights and remedies depend on the entity structure, governing documents, transactions, and applicable law. For guidance concerning a specific matter, see our commercial litigation services. The available remedies depend on the governing agreements, the evidence, and the parties’ respective obligations. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.