From Monkey Island wiki
Little LeChuck is a puppet who constantly argues with Little Guybrush. Hellbeard seems to control him. Unlike Little Guybrush, Little LeChuck refuses to talk about the Ultimate Insult and has never heard of it. He usually talks one or two words like 'flatulence' or 'more grog' to which Little Guybrush replies an appreciative or a bad comment which usually tries to change the subject.
When Guybrush approaches the puppet theatre only Little LeChuck remains visible, since otherwise Admiral Casaba would think pirates were plotting. If spoken to he is very unhelpful but he will switch places with Little Guybrush if asked.
After Hellbeard flees Guybrush can use his puppets to draw Admiral Casaba's attention to the rocky beach, where a well-directed cannon explosion will reveal a buried treasure.
Little LeChuck also appears in the voice option of the menu where he says words like 'sheep' and 'rum' when you try to adjust the sound.
When the cannonball hits the rock that the bronze hat is buried under, the Little LeChuck puppet flies into the air and comes back down again. Judging by the angle, this is probably a reference to the end of the original game when LeChuck's head gets blown up.