Can Your Business Partner Steal From the Business?

I get a lot of calls about thieving partners. People are often disappointed when they hear the answer. If your partner takes $20 out of the bank account using the company’s ATM card and uses that money for lunch, it’s not stealing.  So what is?!

Is Your Business Partner a Thief?

This isn’t an easy question to answer. We have to look at the question from a few different angles to reach a solid conclusion. The key point is that if your partner takes money out of the business without your permission, it isn’t stealing, embezzlement, or any other high crime even if she takes the money for personal use. But there’s a catch. The amount of money taken helps determine whether or not there has been a theft.

Why the Amount Matters

Unlike theft in society where stealing is stealing whether one lifts a $5 item or a $50 item. Sure, it gets into greater penalty if the thief makes off with a $5,000 item.

The partner who uses the ATM to buy lunch is not stealing because the money in the business belongs as much to her as to you. That applies to access to credit as well. However, we have to consider the magnitude of the amount taken and the purpose of the withdrawal.

The determination of theft revolves around three points. Was the money taken under false premise? Did the withdrawal harm the business? Was the amount taken excessive?

The 3 Main Considerations

There is a core principle in business law that says a partner may not harm a business of which he is a partner. That is called fiduciary responsibility. If you and I are partners in a business, I must be able to rely on you not to harm our business. So, it’s perfectly fine for either of us to take money from the business but a line is crossed if either of us puts the business in jeopardy.

That’s why the amount matters. If you take $100 and we can’t pay the rent, you’ve hurt the business. Keep in mind, not attorney is going rush to the courthouse to file and an action on your behalf over $100. That’s why I say that the amount matters. Even those cases where a partner regularly takes money without asking is still not a breach of fiduciary responsibility.

If money is taken under false pretense, we have an entirely different kettle of fish. If I told you I needed a check for $500 to cover the repair of my laptop but I really just want $500 to take to the go-kart track, that’s fraud and that’s breaking the business code. This is where most cases are realized. When a partner takes money and misrepresents the reason as being for business when not, you have a clear case for action. The only problem again is magnitude.

You’ll have a very hard time getting anyone excited to enforce an action over a minor amount of money.

More About Fraud

Fraud is the big one. If there is misrepresentation or deception about money you have a reasonable case against your business partner. The comes the question about what to do about it. Since few attorneys will take a case (and rightfully so) that is small, there are still things you can do if you handle them properly.

Partnership Agreement

The best step to take is to get a Partnership Agreement in place that defines all the dealings with money. You can set limits, require mutual understanding, and even forbid discretionary spending. If a rule is part of a Partnership Agreement and your partner does not abide by it, you have a breech of contract and that is enforceable. Again, you find an attorney to rush off to court, but it does give you some added rights.

Easier for You to Get Out or …

If you get financial terms into a Partnership Agreement, and should your partner continually break that agreement, you may exit the partnership or, under some circumstances, force your partner into a silent position in the business. You might even be able to remove a partner who commits serious violations of the Partnership Agreement. Having a contract puts you in a better position than not having one. If your partner won’t sign, that too can be grounds for removal.

Summary

It might be rude for your partner to take money out of the business for his own purpose, but generally, it’s not ‘legally’ wrong. If, however, a partner takes money for a business purpose but uses the funds for personal purposes, that’s fraud. Before we get too excited about that ‘gotcha’ moment, we have to consider magnitude. You won’t get much support for action if your partner took a few bucks for lunch.

And finally, a Partnership Agreement is a great way to control these things so they don’t get out-of-hand. Further, a Partnership Agreement is a contract. If that contract is violated, you have a far better position than if no agreement exists.

If your partner is adding stress to your life, contact me and I’ll help you work it out. It’s what I do.

Chris Reich, TeachU

“Even if it is not technically theft, having a partner you can’t trust is very stressful. Get advice before it gets out-of-hand or it will hurt the business and be very expensive to fix.”