Can My Business Partner Withdraw Funds Without My Consent?

A business partner cannot withdraw the company’s funds for personal use. It is called embezzlement when a business partner withdraws funds for personal use.

Brad Nakase, Attorney

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Summary

While it may be bad form for a partner to withdraw money from the business for personal reasons, it is legally not considered wrong. However, if a partner says he is withdrawing money for a business purpose but proceeds to use it for personal reasons, then this qualifies as fraud. Again, though, what really matters is the magnitude, or scale, of the problem. If a partner took some money to buy a nice lunch, it will realistically be hard to find a lawyer who will take the case to court.

The best step for a business owner to take is to create a Partnership Agreement. This is a great way to make sure things don’t get out of hand. If the contract is broken, then the business owner is in a much stronger position to penalize the guilty partner.

Signs Your Business Partner Is Stealing

It is not always easy to determine whether a business partner has been stealing from his or her company, and whether or not they may be designated a thief. It is necessary to study the question from a number of perspectives in order to reach a defensible conclusion. One should be aware that if a partner is taking money out of the business without permission, this is not necessarily stealing, embezzlement, or any other high crime. It would only be illegal if the partner is using that money for personal reasons. Still, there is a catch. The quantity of money taken can help establish whether there has been an actual theft, legally speaking.

Why Does the Amount Matter?

Normal theft as we experience in society is when an individual steals an item or service, whether it is worth $5 or $50. If the thief takes more money, say $5000, then the penalties tend to be more severe.

The business world understands theft slightly differently. A business partner who uses the company credit card at an ATM to buy a sandwich is not stealing. This is because the money in the business belongs to him or her just as much as it does to the other partners. This concept applies to access to credit also. That said, when it comes to defining business theft, it is necessary to take into account the amount of money taken and the purpose for which it was withdrawn.

How Does One Determine Business Theft?

In business law, there is a general understanding that a partner may not harm a company which is a partner of. This concept is called fiduciary responsibility. If Partner A and Partner B are in business together, then Partner A should be able to rely on Partner B not to harm or damage the business, and vice versa. Therefore, it is perfectly acceptable for either partner to take money from the business so long as that withdrawal does not put the business at risk.

For this reason, the amount taken matters. If a partner withdraws $100 and as a result the company cannot pay the monthly rent, then that partner has harmed the business, even over such a small amount. That said, an attorney will be hesitant to pursue a lawsuit over a meager $100. Again, the amount plays a large role. Even when a partner regularly withdraws money without asking permission from his or her colleagues is still not guilty of a breaching his or her fiduciary responsibility.

Now, if money is withdrawn under false pretense, then that is a different matter entirely. If Partner A told Partner B that he needed a check for $500 to cover the repair of his work laptop, but instead he used that money to book a flight to Hawaii, that would be fraud. This kind of expenditure would therefore break the business code. These types of situations are where most legal cases stem from. When a business partner withdraws money and lies that the reason involved the company when it does not, there is an obvious case for legal action. The only issue, again, is the magnitude of the situation. It is very difficult to get an attorney willing to go to court over a small amount of money.

If a partner commits fraud, however, then there is a much greater likelihood of being able to take a business partner to court. Fraud would be the misrepresentation or deception about the use of money taken from the business. Luckily, even if the case is too small for an attorney to accept, there are other methods one may use to handle these situations oneself.

How a Partnership Agreement Protects Against Fiduciary Breaches and Fraud

One of the best things a business partner can do is to set up a Partnership Agreement. This document will define all dealings with money. An owner can set limits, require mutual agreement, and even block discretionary spending. If a partner then breaks a rule included in the Partnership Agreement, there is a breach of contract which is enforceable by law. While it may still be difficult to hire an attorney willing to take the case, the owner of the business may enjoy added rights.

If an owner established a Partnership Agreement that includes financial terms, and his or her partner continually breaks the agreement, then the owner has a few options to consider. He or she may choose to leave the partnership, or they could decide to force the partner into a silent role in the business. It may even be possible to remove a partner who commits serious breaches of the Partnership Agreement. Having this kind of contract in place puts a business owner in a much better position than if he or she did not have one. If a partner refuses to sign this agreement, then this can also be grounds for removal from the partnership.

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