When disputes arise among business partners, co-owners, board members, or operators, litigation often follows. Whether it is a breach of fiduciary duty claim, a misuse of company assets, or a deadlock among members or shareholders, these cases can quickly become high-stakes battles.
One of the most overlooked—and contested—questions in these disputes is: Who pays the legal bills? And more specifically, can company money be used to pay them?
Here are some guidelines if you own or operate a corporation, limited liability company (LLC), or partnership, and you are involved in a dispute—whether you are the one bringing the claim or defending it.
What Types of Lawsuits Are Involved?
These issues often arise in:
- Derivative actions brought by minority owners claiming the controlling parties harmed or harming the business
- Internal disputes where Members or shareholders are suing each other over control, access to financials, or diversion of funds
- Claims of mismanagement, fraud, or breach of fiduciary duty
Who Might Use Company Funds in a Lawsuit?
In most cases, the parties seeking to use business funds for legal costs fall into two categories:
- Owners or executives initiating a lawsuit—typically claiming they are doing so on behalf of the company to protect its interests (a derivative action)
- Owners or Managers defending themselves against claims of wrongdoing (e.g., a managing Member accused of misusing funds)
Why Is This Important?
The misuse of business funds to pay for personal legal defense is not only legally risky, but it can also trigger additional claims. In many cases, the very act of using company funds to pay for legal defense inappropriately has become a central issue in the litigation itself, leading to orders to repay the business, claw back demands, or even fiduciary duty breach findings.
How Does the Business Entity Type Affect the Issue?
These rules apply across all types of businesses, whether it is:
- A corporation with shareholders and a board of directors,
- An LLC with managing Members, or
- A partnership where general partners hold decision-making power.
However, it is important to note that the entity’s legal form matters. For example:
- Corporations often have bylaws or statutory provisions that allow (or limit) indemnification.
- LLCs and partnerships rely more heavily on their operating or partnership agreements.
- Some entities, like condominium associations, may be unincorporated and fall completely outside corporate indemnification rules.
So, When Is It Permitted to Use Business Funds for Legal Fees?
Only under very limited circumstances.
Here is how it generally breaks down:
- If the governing documents are silent, the general rule is no reimbursement or advancement of legal fees unless the court finds it equitable and justified under the circumstances.
- If the lawsuit is in the company’s name, and the company benefits from the outcome, courts may allow the company to reimburse the plaintiff’s legal fees—but only after the case is successful and has created a benefit for the business.
- If a company officer is defending a lawsuit and the company’s bylaws, operating agreement, or partnership agreement explicitly provide for indemnification, that officer may be entitled to use company funds—again, typically only if they acted in good faith and were ultimately successful.
How Should You Protect Yourself or Your Business?
- Review your governing documents.
- Make sure your bylaws, operating agreements, or partnership agreements clearly address who may be indemnified, under what circumstances, and whether fees can be advanced during litigation.
- Act in good faith.
- Even if indemnification is available, it usually requires a showing that you acted honestly and in the best interests of the business.
- Do not assume reimbursement.
- If you are bringing a derivative action or defending one, do not expect legal fees to be covered unless the court specifically orders it or the governing documents provide for it.
- Consult experienced counsel early.
- These are high-stakes decisions with real consequences. The right legal strategy, and understanding what your business can and cannot pay for, can make all the difference.
Final Thought
Using company funds to pay legal fees in business disputes is not as simple as cutting a check from the business account. The rules are technical, the consequences are serious, and the optics can be damaging. If you are in a dispute involving your business or co-owners, make sure you understand where the law draws the line—and stay on the right side of it.
If you are facing a partnership dispute, ownership battle, or derivative claim, our litigation team helps high-stakes clients protect what they have built. Reach out to schedule a confidential consultation.
With offices in Albany, Buffalo, Rochester, New York City, we can help you across New York State.
To learn more about these topics, check out our Legalities & Realities® Podcast and other related blog posts:
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- Legalities & Realities® Podcast:
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This blog post is for informational purposes only and does not constitute legal advice. For specific legal counsel, please contact our office directly.