Derivative Actions for LLC Members and Shareholders in California

Last updated: October 2026

When the people running a California company harm it, and the company will not sue them, an owner can sue on the company's behalf. That is a derivative action. California requires the plaintiff to have owned an interest when the wrongdoing occurred, to have demanded action from management or explained why demand was futile, and, if the defendants move for it, to post security of up to $50,000. Kolmogorov Law, P.C. brings and defends derivative claims for LLC members and shareholders in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss whether your claim is direct, derivative, or both.

Direct claim or derivative claim

The distinction decides who recovers. If a manager diverts company revenue to a side entity, the company was harmed; every owner suffers only in proportion to their stake. That claim belongs to the company and must be brought derivatively. If the same manager refuses to let you inspect the books or cuts off the distributions owed to you specifically, you were harmed directly and you sue in your own name.

Most ownership disputes contain both kinds of claims, and pleading them in the right posture matters. A direct claim pleaded as derivative gives the company, not you, the recovery. A derivative claim pleaded as direct gets dismissed.

Who can bring one

For an LLC, the complaint must allege that the plaintiff was a member, of record or beneficially, at the time of the transaction complained of or any part of it. (Corp. Code, § 17709.02, subd. (a)(1).) An interest that later passed to the plaintiff by operation of law from such a member also qualifies. The corporate rule is the same, measured by shares. (Corp. Code, § 800, subd. (b)(1).) A court has discretion to excuse that requirement on a strong preliminary showing, but the exception is narrow.

The practical lesson: an investor who bought in after the diversion happened usually cannot sue over it derivatively.

The demand requirement

The plaintiff must allege with particularity the efforts made to get the managers to take the desired action, or the reasons for not making that effort. (Corp. Code, § 17709.02, subd. (a)(2).) The plaintiff must also have informed the company or the managers in writing of the ultimate facts of each cause of action, or delivered a copy of the proposed complaint. Corporations follow the same rule, with the demand directed to the board. (Corp. Code, § 800, subd. (b)(2).)

In a two-member LLC where the other member is the wrongdoer, demand is often futile, and the complaint says so with specifics. In a company with independent managers, a written demand goes out first. Either way, the letter is drafted to be an exhibit, because it will be one.

The security motion

Within 30 days after service of the summons, the company or a defendant manager may move for an order requiring the plaintiff to furnish security for the defense's reasonable expenses, including attorney fees. The grounds are that there is no reasonable possibility the action will benefit the company or its members, or that the moving defendant did not participate in the transaction. If the court finds a probability in support of a ground, it fixes security in an amount not exceeding $50,000. (Corp. Code, § 17709.02, subds. (b), (c).) The plaintiff may instead post a $50,000 bond at any point and end the motion. (Corp. Code, § 17709.02, subd. (d).) Shareholder derivative suits carry the same $50,000 cap. (Corp. Code, § 800, subd. (d).)

If security is ordered and not posted within the time the court sets, the action is dismissed as to that defendant. (Corp. Code, § 17709.02, subd. (c).)

The security motion is the defendants' first weapon, and it is decided on evidence, not pleadings. A plaintiff who comes to court with bank records showing where the money went rarely has to post the full amount. A plaintiff with suspicions and no documents often does.

What a derivative case looks like

The usual defendants are the managing member or the controlling shareholder, and the usual claims are breach of fiduciary duty, conversion, and an accounting. Common fact patterns: company funds paid to a relative's business; a manager's salary raised without a vote; a customer contract steered to a new entity the manager owns; inventory or equipment moved to an affiliate. Our fiduciary duty guide and our page on a partner who steals from the company describe the underlying claims.

Recovery goes to the company. In a two-owner company that is often fine, since the plaintiff owns half of whatever comes back, and the case usually ends in a buyout or a dissolution with the recovery credited. In a larger company the plaintiff may recover attorney fees from the company under the common fund doctrine if the suit produced a benefit.

Defending a derivative claim

I defend these too. The security motion is the first step, and the contemporaneous ownership and demand allegations are tested on demurrer. Beyond procedure, the defense is usually the business judgment rule: the decision was made in good faith, on reasonable information, for a legitimate business purpose. That defense requires documents, which is why managers who kept minutes and approvals win these cases more often than managers who ran the company from their phone.

Where these cases are heard

Derivative actions are filed in the Superior Court where the company has its principal place of business: the Central Justice Center in Santa Ana for Orange County companies, the Stanley Mosk Courthouse for Los Angeles. Cases with many owners or complicated accounting are often designated complex. Before filing, a records demand under the inspection statute usually produces the evidence the complaint needs; see our page on member access to books and records.

What to bring to the first meeting

Bring the operating agreement or bylaws, your ownership documents, the tax returns and K-1s, and whatever shows the conduct you are complaining about: bank statements, contracts, emails. Write down when you first learned of it. Timing affects both the ownership requirement and the statute of limitations.

Frequently asked questions

What is a derivative action?

A lawsuit an owner brings on behalf of the company to recover for harm done to the company, usually by its own managers or controlling owners. Any recovery belongs to the company, not the plaintiff personally.

Can an LLC member sue the managing member?

Yes, directly for harms to the member personally and derivatively for harms to the company. The derivative claim requires that the member held an interest at the time of the wrongdoing and made a demand on the managers or explained why demand was futile. (Corp. Code, § 17709.02, subd. (a).)

Do I have to post a bond to file a derivative lawsuit in California?

Not automatically. The company or a defendant manager may move within 30 days of service for security, and the court may require up to $50,000 if it finds a probability that the suit will not benefit the company. (Corp. Code, § 17709.02, subds. (b), (c).) Posting a $50,000 bond voluntarily ends the motion. (Corp. Code, § 17709.02, subd. (d).)

What is the difference between a direct and a derivative claim?

A direct claim redresses harm to you as an individual owner, such as denied inspection or a distribution withheld from you alone. A derivative claim redresses harm to the company, such as diverted revenue, and the recovery goes to the company.

Do shareholders of a corporation follow the same rules?

Largely yes. Corporations Code section 800 imposes the same contemporaneous ownership and demand requirements and the same $50,000 security cap for shareholder derivative suits. (Corp. Code, § 800, subds. (b), (d).)

Talk to a California shareholder and LLC member dispute attorney

If a manager or controlling owner is harming your company and the company will not act, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is at 327 Magnet, Irvine, CA 92618, and represents owners in Orange County, Los Angeles, and throughout California. See also our guide to shareholder and LLC member disputes and our partnership dispute page.

This page provides general information about California law and is not legal advice. Outcomes depend on the governing documents, the ownership history, the evidence, and the court.