"Sheffield United is today initiating legal proceedings against West Ham United seeking substantial compensation for relegation from the Premier League," the club said in a statement.
The club estimates the cost of relegation to be more than 30 million pounds.
Sheffield United claim West Ham gained an unfair advantage because Argentina forward Carlos Tevez, whose form in the second half of last season was inspirational and helped save the east London team from going down, was not eligible to play for them.
A West Ham spokesman said the club would study any letters and documents received before commenting on the Yorkshire club's actions.
Sheffield United said West Ham should have had points deducted for breaking the league's transfer regulations, but their legal moves to force this to happen have not succeeded.
West Ham were fined 5.5 million pounds by the Premier League for fielding Tevez and compatriot Javier Mascherano. Midfielder Mascherano joined Liverpool earlier this year, while Tevez moved to champions Manchester United last week.
"The players, particularly Tevez, played a key role in West Ham's season, giving West Ham an unfair advantage at the expense of the other Premiership teams -- including Sheffield United -- all of which had played by the rules," said a further statement on the club's Web site (www.sufc.premiumtv.co.uk).
"Sheffield United is confident that sufficient remedies exist in law to ensure the Tevez affair cannot simply be brushed under the carpet."