What to Do If You Think Your Business Partner Is Stealing?

You want to document everything and discuss your options with a business attorney. If you can substantiate that your partner is stealing, you may sue the partner for breach of fiduciary duty. Do not make accusations with evidence.

Author: Brad Nakase, Attorney

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Stephen and Leo are partners in a business venture known as Particle Engine, a game design studio. While the company has been performing very well over the past year, making several large contracts, the business bank account does not reflect this success. Confused, Stephen goes to the company accountant to investigate why the numbers do not match the profit. It turns out that Leo has been stealing money from the company account behind Stephen’s back. He has been using stolen money to fund his own gaming company on the side. Feeling betrayed, Stephen wonders what to do now that he has discovered his business partner stealing from the company.

Steps to Take When a Business Partner Is Stealing

While a business owner does not have to be best friends with his or her business partner, it is important that in forming a company, they choose an individual whom they can trust entirely. If the partner ever betrays the owner’s trust and steals money or assets from the business, it can lead the company and the owner to financial ruin or otherwise harm the business venture. Regardless of whether the business owner decides to repair the broken relationship or end it altogether, he or she would be well advised to seek out the help of a lawyer rather than taking the matter into their own hands. This is because there are some important things that one should be sure to do in the event of a potential theft. Likewise, there are some things that one should absolutely avoid doing. The sooner one contacts a lawyer for assistance, the better the outcome.

First, let us go over some of the things a business owner should and should not do when they suspect a partner is stealing from the company.

A Business Owner Should Document Everything

If money goes missing from the business’ accounts without explanation, then the owner should be sure to make detailed reports of all the money going into and out of the business. It is much easier to protect a business from theft, or discover a potential thief, by keeping careful track of expenditures and withdrawals. If the theft is already happening, the owner should record how much money is going missing and when it is occurring. He or she should compare transactions from the company bank account to employees’ pay stubs and vendor receipts.

The owner should also put strict controls on the business’ assets and cash. All purchases and expenses should be matched with a receipt that bears the business logo, name, or address. Any unnecessary signers should be removed from accounts, and access to inventory and cash should be limited to those individuals who really need it to operate the business. There should be protections put in place that can prevent a partner from unchecked access to cash and assets. For instance, there might be dual keys to a safe, inventory, and the workplace, as well as dual signatures required in accounts. It may also be worthwhile installing security cameras as an added form of protection in order to observe who is handling inventory and money.

All records should be carefully maintained and copies kept. If a partner is stealing money or assets from the company, then the records will prove it.

A Business Owner Should Not Make Accusations Without Evidence

Bringing raw emotions into the situation is a bad idea. If a business owner immediately accuses his or her partner of stealing without first having solid proof, it can cause irreparable damage to the partnership. It will paint the owner as a bully, and if the ‘theft’ turns out to be a simple mistake or miscalculation, the owner will also look like a person who loses their temper before asking questions. In short, it is not a good look.

A business owner should first make sure that the partner is actually stealing from the business. This can be done by collecting evidence of the misconduct. Simply suspecting someone is stealing from the business is not enough to prove the crime of fraud or embezzlement in court. Many entrepreneurs become convinced that their partner is stealing from them, but when asked, they explain that it is merely a gut feeling or based on their partner’s odd behavior. While the entrepreneur is likely correct in their suspicions, they cannot prove a case using a gut feeling as evidence.

There are a few red flags a business owner should keep an eye out for. These include the following:

  • Excess Distributions: If a business partner is taking out more money from a business account than he or she is permitted to, then this qualifies as a form of theft. If both partners own a 50-50 share of the company, then the distributions should be about equal. If they are not, then this is a red flag that something is amiss.
  • Excess Expenses. If a business partner has suddenly started to charge a lot of personal expenses to the company, then this is potentially a problem. There should be an agreement between partners regarding the types of expenditures that are allowed to go on the company account.
  • Sudden and Unexplained Income Changes: If the company’s sales suddenly drop without reason, then this could be an indicator that a partner is taking money or not reporting transactions.

When a business owner suspects a partner of theft, it is important that he or she consider bringing in outside experts. This may include a forensic accountant who can analyze recent transactions and examine the company books to ensure that everything is correct.

One should be careful accusing their partner of stealing. If the owner makes a mistake in their accusation, then the future of the business could be put in danger. Therefore, it is important to hire an experienced attorney who can help guide one through the investigation process as well as any legal action.

A Business Owner Should Discuss Their Options with a Lawyer

A business owner should be sure to discuss the issue with a commercial litigation attorney right when they identify the problem. This lawyer can help advise on whether it is appropriate to file a lawsuit, and whether it is better to buy out the thieving partner or select another option.

When a partner steals money from his or her own company, it is a very serious legal matter with high stakes. This is because there is usually a large amount of money or assets involved, and the damage to a company can be severe. Each step in the legal process should be carefully planned and put into action. To help with this, it is recommended to work with an experienced business and litigation attorney who can ensure that an individual is suitably prepared. He or she can also ensure that all the relevant laws and procedures listed in the corporate documents are followed accurately. An attorney can help an individual recover as much money as possible and has the skills and experience to help one achieve their goals.

A business owner may file a criminal complaint against his or her business partner for stealing, or embezzlement. According to FindLaw, embezzlement may be defined as “theft/larceny of assets (money or property” by a person in a position of trust or responsibility over those assets.” It is probable that a business owner formed a business relationship with the partner and designated him as a signer on the business accounts. This would be because the owner trusted the partner to act in the best interests of the company. If the partner then stole money or assets from the business, he or she broke that trust and could be guilty of embezzlement.

If a business associate, such as a partner, is taking money from their company under a business pretext but is actually using it for personal reasons, this action could qualify as fraud. The business associate lied, and the owner has believed and relied upon the lie. As a result, the business has suffered damages or losses as a result of the partner’s deceitful actions. This partner may be guilty of embezzlement, which is defined as the theft of money or business assets by an individual in a position of trust within a business. The partner has also violated their fiduciary duty, which is their responsibility to protect the company in which they function as an official.

A business owner may sue his or her partner for breach of fiduciary duty they know for certain that the individual has been stealing money from the business’ accounts. A fiduciary relationship means that a person is required to act in the other person or business’ interests on matters pertaining to the relationship. Generally, taking money that belongs to the company and using it for personal reasons that do not benefit the business goes beyond the scope of acceptable conduct for a business partner.

When a business partner commits the criminal offenses of embezzlement and fraud, it may be easier to remove the individual from the company and recoup any lost money or property. An attorney can offer guidance regarding whether or not to file criminal charges. A lawyer may also help to manage negotiations with the offending business partner and the attorney representing them. The victim of their fraud is entitled to recover civil financial damages as a result of the breach of fiduciary duty. It may also be possible to recover the assets or money that the partner stole from the company. When the thief broke his or her fiduciary duty to the company, he or she put the business at risk. The harm to the company’s performance as well as any financial effect on its performance may add to the civil damages that can be recovered.

A Business Owner Should Refer to the Company’s Articles of Organization

Depending on the business structure, some companies may be required to file articles of organization prior to conducting business. If the articles of organization address the issue of dealing with a partner’s misconduct, then it is necessary to follow these provisions.

It can be difficult to prove that a business partner stole funds from a business, especially if a business owner never imagined such a scenario arising and therefore did not prepare in advance. If a business is designed as a partnership, in most states all partners generally have the legal right to access and manage business assets. A written partnership agreement has the ability to outline and limit the power partners have to make decisions about accounts and money.

For instance, a partnership agreement has the ability to prevent partners from taking personal loans out of the business’ account. It can also limit partners from making big purchases for mixed business and personal reasons without the permission of other partners. If a business lacks a partnership agreement in writing, it can be difficult to prove that a partner is guilty of fraud. This is because the case can be reduced to the owner’s word against the partner’s when it comes to how the fund was intended to be used.

If a company has a written partnership agreement, then the business owner should collect evidence to prove the theft of money or assets. This evidence should include statements and receipts. It is important to ensure that one has a copy of the company’s account books and financial statements so that there is proof of expenses and income. If there is no written partnership agreement that details what qualifies as unauthorized behavior, a business owner must rely on any documentary proof that he or she can find. This documentary evidence should include the intentions of a business owner and the suspect partner, including emails, letters, and texts. Any written evidence like this can help make charges stick in court.

A Business Owner Should Not Make Empty Threats

It is true that stealing from a company qualifies as embezzlement and falsifying financial records is fraud. These are both crimes that can result in steep penalties and prison time. However, it is not wise to threaten one’s partner with arrest. It is better to meet with an experienced attorney who can advise whether to press criminal charges related to the partner’s theft. This is not, however, a decision one should make on one’s own.

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