Suspecting a business partner of theft is one of the most difficult situations an owner can face. It’s a breach of trust with serious financial and legal implications that can threaten the company’s survival. This guide is for you if you think your business partner is stealing. It outlines specific indicators of financial misconduct and then details your potential options as a business owner.
Part 1: Is Your Business Partner Stealing from You? Identifying the Indicators of Financial Misconduct or Stealing
Before taking action, it’s critical to determine whether your concerns are supported by tangible evidence.
Behavioral Red Flags
- Financial Secrecy: Your partner becomes defensive or evasive when asked about money and may restrict your access to financial accounts.
- Unexplained Lifestyle Changes: They are suddenly living a lifestyle that their known income cannot support.
- Sole Control Over Finances: They insist on managing all the books and paying all the bills, blocking you from any oversight.
- Vague Excuses for Poor Performance: They blame external factors for poor financial results without providing transparent data.
Financial Red Flags
- Unusual Transactions: You find frequent cash withdrawals or payments made to unknown people or companies.
- Phantom Vendors or Employees: The books show payments to vendors or staff you don’t recognize.
- Personal Expenses on Company Accounts: Business funds are being used for personal meals, travel, or other items.
- Missing Financial Records: Invoices, receipts, or bank statements are consistently unavailable or “lost.”
- Sales Are Steady, but Profits Are Down: Revenue is consistent, but profit is shrinking without a legitimate business reason.
- Vendor or Customer Complaints: Vendors report unpaid invoices that your books show as paid.
While not absolute, if multiple red flags from this list sound familiar, a reasonable conclusion is that your business partner is stealing from the business.
Part 2: Strategic Action Plan
Step 1: Engage Professionals and Determine Your Goals
Consider getting professional guidance. While not uncommon, Partners stealing from the business can be complex to handle on your own.
Consult with an Attorney. Talk to a lawyer with experience dealing with partnership disputes. They will review your situation, explain your legal rights, and outline your realistic options.
Determine Your Goal. Decide on your desired outcome. What is the end goal?
- Do you want to take full control of the business by buying out your partner?
- Do you want to dissolve the business and recover your share of the assets?
- Can the partnership be salvaged if the money is returned and strict new controls are implemented?
- Do you simply want to be bought out and exit the company?
Consult with a Forensic Accountant. Forensic accountants can conduct an official investigation to trace stolen funds and produce a report that will serve as evidence.
Step 2: Secure Evidence Under Legal Guidance
Gather Documentation of operating agreements and other corporate documents, bank statements, accounting logs, expense reports, and any other relevant records.
What Legal Options do You Have?
Most partnership disputes are resolved through negotiation, but that negotiation is backed by the threat of legal action, and sometimes legal action ends up being necessary, especially when trust is broken by something as serious as a business partner stealing.
Goal: Take Full Control of the Business
If your objective is to remove the other partner and continue operating the business, your primary option is a forced buyout.
The Legal Leverage: Your partner’s theft is a significant breach of fiduciary duty. This is their legal obligation to act in the best financial interest of the company and their partners. This breach gives you powerful leverage. It may also violate specific clauses in your operating agreement, constituting a breach of contract.
How It Works: Your attorney, armed with the forensic accountant’s report, will propose a buyout of your partner’s equity. Crucially, the total amount of the stolen funds, plus any legal and accounting fees incurred, would be deducted from their share’s valuation. In some cases, the theft might be so significant that it completely wipes out the value of their equity, forcing them to forfeit their stake in the business.
Goal: End the Partnership and Recover Your Investment
If the breach of trust is too severe to continue, and a buyout isn’t feasible, your goal may be to dissolve the business and liquidate its assets.
The Legal Pathway: This is known as judicial dissolution. You can petition a court to dissolve the company because your partner’s fraudulent actions make it “not reasonably practicable to carry on the business” with them.
How It Works: A court can order the business to be wound down. During this process, the company’s assets are sold. Before any proceeds are distributed to the partners, the stolen funds are treated as a debt owed by the thieving partner back to the business. This ensures you and any other creditors are made whole first. The remaining assets, if any, are then distributed according to the partnership agreement.
Goal: Salvage the Partnership (With Strict Changes)
This is the least common path, as trust is hard to rebuild. However, if the amount is small or the circumstances are unique, you may wish to continue the business together.
The Legal Framework: This would be achieved through a formal settlement and restructuring agreement.
How It Works: Your partner would have to agree to several non-negotiable terms, including:
- Full Restitution: A legally binding repayment plan for all stolen funds.
- Relinquishing Financial Control: Amending the operating agreement to permanently remove their access to bank accounts and bookkeeping.
- Implementing New Controls: Requiring dual signatures for all checks, mandatory third-party audits, and full financial transparency. Failure to adhere to this new agreement would trigger an immediate buyout or dissolution.
The Role of a Civil Lawsuit
Nearly all of these options are driven by the potential for a civil lawsuit. If a lawsuit becomes the last resort, several causes of action can often be alleged in the case of a business partner stealing, including:
- Breach of Fiduciary Duty: As mentioned, this is the core of the wrongdoing.
- Conversion: This is the legal term for theft, where a partner wrongfully took control of company assets for their own use.
- Fraud: If the partner used deception (e.g., creating fake invoices) to steal the money.
- Breach of Contract: If their actions violated the terms of your written partnership agreement.
Filing a lawsuit initiates a formal legal process that forces the other partner to respond. Often it pressures them to agree to a favorable settlement (like a buyout or restitution) to avoid the time, expense, and public nature of a court battle. This is separate from any criminal action for embezzlement, which would be pursued by a district attorney, not you.
Conclusion: Protecting Your Assets and Your Future
Navigating financial misconduct within a partnership is a serious challenge, but a resolution is achievable through a deliberate and professional approach. Your priority must be to act strategically—not emotionally—to protect your assets and the future of your business.
Successfully managing this process requires experienced legal counsel. At Schneider & Branch, we have successfully handled a wide range of partnership disputes and have reached resolution ranging from negotiating simple buyout agreements all the way through jury trials.