It's bad news, but if you're careful it's not the end of the world
You’re going over your business’ financial records, and you notice a transaction you’ve never seen before, to an account you don’t recognize. And then you find another. And another. A pattern emerges before your eyes: it looks like your business partner is stealing.
|The first reaction|
|So what do I do?|
|What does this kind of theft look like?|
|Criminal vs civil|
- Business partners sometimes steal from their own business
- Gather evidence and talk to your lawyer (but not the business’ lawyer)
- Stay calm
The first reaction
When an employee steals from your business, it can feel like a slap in the face. And if they’re a key part of the operation, getting things back to normal is never easy.
It’s even worse when your business partner – a co-owner that you’ve trusted to grow a company with you – is enriching themselves at the expense of your shared project.
When you first discover that your business partner has been stealing, you will most likely be very upset. You may be tempted to change the locks, confront them, or even threaten them. Please don’t. It’s important that you stay calm and pursue the matter in proper channels if you want the most favorable outcome for both yourself and the business.
So what do I do?
Don’t panic. For best results, slow down and take things step by step.
Talk to a lawyer
The absolute first thing you want to do is talk to an attorney. There are other steps to take after this, but you should not be taking any action that a qualified attorney hasn’t specifically instructed you to do.
One important note here: you should not be using the same attorney that you utilize for your business. That’s just asking for a conflict of interest. You want to work with an attorney whose only interest in the matter is resolving it in your favor.
|📑Note: During this process, it’s also a great idea to have an advisor focused on the interests of the business itself, rather than what’s best for you personally.|
Once you’ve kept your cool and talked to an attorney, it’s time to start putting together the evidence. You don’t want it to be your word vs your partner’s, and you don’t want to be going after them for one fraudulent action that they can explain away. This sort of thing nearly always follows a pattern, and you need to find and show that pattern.
An attorney can help with this through the process of discovery, which allows them to demand documents relevant to the case. You should also be copying any evidence you find of fraudulent transactions, or any other suspicious activity. A qualified CPA (once again, maybe not the one you’re using for the business) can help here.
Dissolve the business relationship
Finally, you will probably want to dissolve the business relationship. The process differs from state to state, so once again, ask your attorney what to do.
What does this kind of theft look like?
Some kinds of theft, like shoplifting or burglary, are very straightforward. There’s not much room for confusion.
Things aren’t as simple when it’s a partner stealing from a jointly owned business. That kind of theft is hard to identify and even harder to prove.
The most obvious form of theft is, well, theft: your partner is absconding with objects, equipment, or money that rightfully belong to the business.
Of course, as a co-owner, your business partner is perfectly within their rights to make use of your shared property. The key detail that turns this normal activity into theft is when they’re taking the objects or money off premises for personal gain contrary to the best interests of the business.
Intellectual property theft
It can get trickier when your business partner is making off with your intellectual property. This can include using copyrights or patents that belong to the business, poaching your clients, and more.
The specific wording of your business partnership agreement matters here, but you may be able to sue your business partner if they’re committing intellectual property theft from your business.
Fraud, essentially, means lying for financial gain. If your partner claims they’re taking funds out of the business for legitimate purposes but, in reality, is misusing that money to enrich themselves at the business’ expense, that is fraud.
Fraud is both a criminal and civil offense, and it can be difficult to prove. You must be able to demonstrate:
- Your partner intentionally lied
- You reasonably relied on that lie
- You or the business suffered harm from doing so
This may be counterintuitive, but if your partner had previously demonstrated that they were untrustworthy, that can actually hurt your case. After all, if you knew about it and chose to operate a business with them anyway, it can’t be that bad, right?
Yes, embezzlement and fraud are two different things. Well, kind of.
Embezzlement means illegally diverting funds you are responsible for away from a business, whereas fraud is any deception for financial gain and doesn’t have to involve a business. All embezzlement, therefore, is fraud, but not all fraud is embezzlement. It’s an “all squares are rectangles” situation.
The classic example of embezzlement is a manager transferring money from a business account to their personal account, but something as simple as an employee pocketing cash instead of putting it in the register can count. It’s usually a bigger crime than simple fraud and can involve felony charges.
Breach of fiduciary duty
Fiduciary duty is a legal responsibility to act in the best interests of another party. The usual example here would be a lawyer, who has a legal responsibility to act in the best interests of their clients.
In a partnership, you and your partner have a fiduciary duty to each other and must act in the best interests of the shared business. Any type of theft described above would count as a breach of fiduciary duty and can entitle the injured party to civil financial damages.
Criminal vs civil
If you discover your partner taking money out of the business, you may be tempted to go to the authorities right away. However, it’s not very likely that any law enforcement or prosecutors will be very interested in the case. Your partner most likely has the legal right to access those funds and make decisions about them, and it’s very difficult to get criminal charges to stick.
More likely, you will be pursuing the matter as a civil business dispute. Your partner won’t go to jail, but they will have to pay back the value of what they stole, and most likely a significant amount on top of that in damages.
If you want criminal charges to stick, having a written partnership agreement is one of the best ways to establish rules about what can be done with business funds. Otherwise, it can be your word against your partner’s.
Sometimes people do bad things, and sometimes people means your business partner. It’s not fun, but if you keep your cool, keep clean, get the proper information, and do what your attorney tells you, you’ll get through it.
If you want help setting up your future business activities in the safest, most advantageous way possible, schedule a call with the expert team at DiMercurio Advisors. Just don’t invite your old business partner.