If you are a co-owner of a company, and you believe (or know) that your partner is stealing from the company, you have rights and you have options — even if you’re not “in charge” or own a minority interest.
Actionable Claims When a Partner Steals
There are a number of possible issues that come arise when a partner steals from the company, and you options as against your partner.
Cheating on Taxes
When an owner takes something of value from the company, it becomes a taxable event and needs to be reported on taxes as a “distribution.” If your company is taxed as a S-Corporation, then all distributions must be made to all partners pro rata according to ownership percentage. If your partner steals from the company, and either doesn’t report it as a distribution on taxes or doesn’t provide you with a corresponding distribution to comply with S-Corporation requirements, your partner can potentially commit tax fraud.
Breach of Contract
If your company is a limited liability company (or LLC), you should have an Operating Agreement that discusses how distributions are to be carried out. If there is no Operating Agreement, then you look to state law. Either way, if a partner is taking something of value in a way that isn’t supported by the Operating Agreement (or state law), then your partner is breaching a contract with the other partners for which can be actionable.
If your company is a corporation, you should have Bylaws and a Board of Directors. The Bylaws will define how dividends are to be paid, and if your partner is taking something of value without issuing proper dividends, could again be breaching a contract with the other shareholders.
Breach of Fiduciary Duty and Duty of Loyalty
All owners of a company owe that company a fiduciary duty and duty of loyalty. Taking someone of value from the company, without being a legal distribution or dividend will violate these duties, which are actionable.
Fraud and Embezzlement
Likewise, if a partner takes money from the company that was intended for someone else (i.e. like the other partners), this can create actionable claims for fraud and embezzlement.
What To Do?
It pays to prepare yourself. Make sure to obtain an extra copy of any corporate documents in your home or another safe place outside of your office.
- Seek the advice of a competent business attorney to help you understand your rights, duties and options.
- DOCUMENT EVERYTHING. Keep a journal.
- Be proactive. Don’t let such a circumstance fester, and don’t leave it alone for weeks, months or years. If you do, you may irreparably impact your ability to reclaim your business or its assets.
If your partner’s stealing is putting the company in financial jeopardy, you need to act sooner rather than later. When you do act, you want to:
- Hire an attorney to represent you — it can have a profound impact with your partner, and the attorney may be able to negotiate something on your behalf quickly and cost-effectively.
- If your partner’s behavior is particularly egregious, you can seek a “temporary restraining order” (or TRO). Judges don’t necessarily like to issue TRO’s, so be prepared to back up your request with actual proof of egregious behavior. If your partner’s thefts are accompanied with violence, threats of violence, clear evidence of theft, dangerous activity, drug use, etc, can all be evidence of egregious behavior. Again, DOCUMENT EVERYTHING.
- You can file a lawsuit seeking “a judicial dissolution,” to kick your partner out of the company, or to compensate you for the thefts, loss of the business, lost profits or more.
Ultimately, while it may take a long time, be fraught with emotional distress, and ultimately see your business significantly drop in value, you can be entitled to be “made whole” depending on the circumstances. Talk to a business attorney to understand your legal rights, duties and options and don’t lose hope. The law is on your side.