When a Co-Owner Diverts Business to a Side Entity

If your co-owner is routing work through a company they own separately, the legal name for the problem
is usually usurpation of a corporate opportunity, and it sits inside the broader duty of loyalty that
people who manage a business owe it. The practical question is rarely whether that duty exists. It is
whether you can prove the pattern — and the proof is almost always in the company's own records, which
is why the first move is an information demand rather than a confrontation.

Officers and directors of a Texas corporation owe the company a duty of loyalty. One consequence is
that they ordinarily may not take for themselves an opportunity that belongs to the company: if a
project comes to them because of their role and falls within what the business does, the company is
entitled to hear about it first. That much has been settled in Texas since International Bankers Life
Insurance Co. v. Holloway, 368 S.W.2d 567, 576–77 (Tex. 1963), which states that "[a] corporate
fiduciary is under obligation not to usurp corporate opportunities for personal gain" and holds such
a fiduciary accountable to the corporation for profits that result. That is officer-and-director
authority. For an LLC the starting point is different, and it is the next section.

For an LLC, the answer starts somewhere else — in your company agreement.

Texas changed this in May 2025, and most owners have not caught up.

Under Tex. Bus. Orgs. Code § 101.401, an LLC's company agreement may expand, restrict, or eliminate
the duties its members and managers owe — including fiduciary duties. The word eliminate was added
by Senate Bill 29, effective 14 May 2025. Before that, the statute allowed a company agreement only to
expand or restrict those duties, and whether a Texas LLC could remove them altogether was an open
question that practitioners argued about for years.

So there are now three possible answers to "did my co-owner owe me a duty," and your agreement
decides which one you get:

The agreement is silent. The default rules apply. A manager of a manager-managed LLC is the
company's agent by statute — managers are the governing authority, and governing persons act as agents
in carrying out company business (Tex. Bus. Orgs. Code §§ 101.251, 101.254(a)). A Texas court of
appeals has recognised that an LLC member owes the company a duty of loyalty and a duty not to
usurp its opportunities. Because the Business Organizations Code "does not directly address the duties
a manager or member owes to the LLC," the court presumed those duties "unless the LLC agreement shows
otherwise" (Straehla v. AL Global Services, LLC, 619 S.W.3d 795, 804–05 (Tex. App.—San Antonio 2020, pet. denied)). So this is
a presumption rather than a settled boundary.

And duties owed to the company are not duties owed to you personally. In Bertucci v. Watkins,
709 S.W.3d 534 (Tex. 2025), the Supreme Court held that the court of appeals erred in allowing a claim
that one co-owner owed another fiduciary duties personally, because no such duty had been asserted or
established in the trial court. It did not decide the general rule, but it recounted the argument that
LLC members "do not owe formal fiduciary duties to fellow members simply because of their relationship
as co-members" (id. at 544). That distinction decides who can sue, and it is the subject of the
direct-versus-derivative section below.

The agreement narrows the duty. Common, and often invisible to the owner who signed it — a clause
permitting members to pursue outside business ventures does real work in a dispute like this one.

The agreement eliminates the duty. Now expressly permitted. If your agreement does this, the
diversion you are looking at may not be a breach of anything, and the claim has to come from somewhere
else.

Two more provisions matter before anyone reaches a conclusion. A Texas entity may renounce its
interest in specified business opportunities in advance, in its certificate of formation or by action
of its governing authority (§ 2.101(21)) — which forecloses the corporate-opportunity argument for
whatever was renounced. And specified provisions cannot be waived by a company agreement at all
(§ 101.054), including the company's duty to keep records.

The contrast with a partnership is worth knowing if that is your structure — and it is narrower than
it was. A general partnership agreement may not eliminate a partner's duty of loyalty, which
expressly includes refraining from competing with the partnership or dealing with it adversely
(§§ 152.002(b)(2), 152.205), subject to permitted activity-specific modifications. A limited
partnership is now different. SB 29 added § 152.002(e) effective 14 May 2025, which expressly
allows a limited partnership agreement to eliminate loyalty, care and good-faith obligations to the
extent it says so. The old shorthand — that partnerships have a floor and LLCs do not — no longer
holds across the board. Two businesses with the same economics and different entity types can still
produce different answers on the same facts; you just have to check which type, and which agreement.

What this means practically. The first document in a diversion case is not the case law — it is
your company agreement, and the version in force when the conduct happened. Owners are frequently
surprised by what they signed, and agreements drafted after May 2025 may do things agreements drafted
before it could not.

The public-company version is a board member funding a competitor. The version that produces Texas
litigation is smaller, slower, and harder to see:

The side entity. A second company the other owner controls, which now holds a customer, a
contract, a piece of equipment, or a lease that the first company was using.

The related-party arrangement. The business rents its premises from an entity the other owner owns,
at above-market rent. It buys supplies from a company their spouse runs. It pays a "management fee" to
a holding company nobody voted on.

Compensation set without authority. A salary increase, a bonus, a car, a distribution characterised
as a guaranteed payment — decided unilaterally by whoever controls the bank account.

Family on payroll. Common, sometimes entirely legitimate, and one of the first things a valuation
expert normalises out.

The declined opportunity. A customer approaches the business, and the work is quietly done by the
other owner's separate entity instead. This is the cleanest version of the doctrine and the hardest to
detect, because the transaction leaves no trace in the company's records at all — only in its absence.

Owners tend to describe this as theft, and focus on the cash. There are usually two harms and the
second is larger.

The cash the company did not receive. Direct and countable.

The value of your interest. Every dollar of inflated rent, unapproved compensation, or diverted
revenue reduces the earnings your interest is valued on. In a buy-sell valuation or a later sale, that
reduction is multiplied. A $200k annual related-party overcharge on a business trading at five times
earnings is a $1M problem, not a $200k one — and it compounds every year it continues.

That is why the answer to "should I let this go?" is frequently no even when the annual number looks
tolerable.

A claim for injury to the company ordinarily belongs to the company — even when the injury reduces
what your ownership interest is worth. An owner cannot recover personally merely because the value of
their stake went down with it (Wingate v. Hajdik, 795 S.W.2d 717, 719 (Tex. 1990)). A personal
claim requires an independently enforceable right owed to you, and an injury to you.

Texas relaxes the procedure for closely held companies, and the relief is discretionary. Both the
LLC and corporate statutes define a closely held entity as one with fewer than 35 owners and no
publicly listed or regularly quoted interests (Tex. Bus. Orgs. Code §§ 101.463, 21.563). For qualifying
claims against present or former insiders, specified derivative procedures do not apply, and where
justice requires, a court may treat the proceeding as direct and order recovery paid to the owner
rather than the entity — accounting for creditors and the other owners. Sneed v. Webre, 465 S.W.3d
169, 180–82, 185–86 (Tex. 2015) works through the corporate version.

Two limits worth knowing before you rely on it. The exception does not reach claims against
outsiders simply because the company is closely held. And the statutes say expressly that the exception
does not create a substantive direct cause of action (§§ 101.463(d), 21.563(d)) — it changes the
procedure, not the underlying right.

The distinction decides who the plaintiff is, who any recovery goes to, and what has to happen
first. It is settled early, because getting it wrong is expensive.

Worth knowing that the Texas Business Court's jurisdictional list expressly includes derivative
proceedings and actions alleging that an owner or managerial official breached a duty owed to the
organization or an owner
(Tex. Gov't Code § 25A.004(b)) —
though an amount-in-controversy threshold applies
and most closely held disputes fall below it.

Hypothetical. Not a client matter and not a real company.

Three owners of a Texas LLC operating specialty equipment rental: 50%, 30%, 20%. The 50% owner manages
the business.

Over two years: a new entity he owns begins buying used equipment and leasing it back to the company;
the company's yard lease is assigned to another entity he owns and the rent rises from $9,000 to
$17,500 a month; two large accounts are serviced by a "sister company" with overlapping staff; and his
compensation rises from $240,000 to $430,000 without a vote.

What the 30% owner sees. A distribution that halved, and a K-1 that still allocates her income.

What the records would show. Every one of these leaves a trace in the general ledger, the lease
file, the payroll records or the accounts payable ageing — except the two accounts serviced by the
sister company, which is the diverted-opportunity item and the one that has to be reconstructed from
customer communications.

What the arithmetic looks like. Roughly $102,000 a year of rent differential, $190,000 a year of
compensation increase, plus whatever margin the sale-leaseback and the sister company absorb. At a five
times multiple, the compensation and rent items alone move the enterprise value by well over $1M —
which is why this is a valuation case rather than a theft case, and why it is worth more than the
annual figure suggests.

What she should not do. Confront him by email, download files she no longer has authority to access,
or tell the staff. Each of those converts a documentary case into an argument about her conduct.

Get the records. The general ledger, the lease file, payroll, accounts payable, and the last three
years of tax returns. The records are the case.

Do not act on suspicion. Confrontation before documentation gives the other side time and a
narrative.

Work out whether it is still happening. An ongoing diversion has a different urgency from a
historic one, and if value is being moved right now the timeline compresses sharply.

If a co-owner has left rather than stayed and is competing,
what happens when a co-owner takes the client list
is the adjacent problem, and
what to do in the first seventy-two hours
is the urgent version. The wider picture is
what a locked-in Texas owner can actually do, and this is
our Texas partner dispute practice.

Disclaimer. This publication is provided by Amini & Conant, LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. Should the reader seek further analysis of the subject matter or answers to specific questions about the subject matter, please contact the author at neema@aminiconant.com. This publication is considered advertising under applicable state laws.

Back