Your Business Partner Keeps Taking Money from the Bank Account

Chris,

I am in a 50-50 partnership. My business partner has taken a lot of money from the bank account. We can barely cover the bills, but he took money on Friday to take his girlfriend to Las Vegas over the weekend. I'm sick of this. How can I stop his stealing from the business? 

When a Partner Takes Money from the Business, It's Not Theft or Embezzlement

Partners take advantage of partners every day and they get away with it. It is the most painful call I get. It sounds like this, "I put all the money I had into starting our business. My partner had bad credit and no money, but he promised to do all the work to get the business going. I've done most of the work and he keeps taking out money. What can I do? Isn't that embezzlement?"

The sad news is that, no, when a partner takes money from the business for his own personal use, it's not a crime. It's not a crime even if he takes all of the money.

What???!!! A Partner Can Take All the Money and It's Not a Crime?

That's painfully true. Under the law, all of the money in the account belongs to both partners. Not half. All. Each partner has 100% responsibility for all liabilities. And, each partner owns 100% of the business. Each partner doesn't own half. As long as they are partners, they, together, own 100% of the business. That means a partner can take money—all the money if they want to.

There Is a Little Protection But So What!

It hardly seems right, does it. And fair? Hardly. But if it didn't work that way, think about how to resolve this. There is just enough money in the bank to cover the rent and payroll, One of the partners doesn't want "his half" of the money to go to payroll. If 50-50 partners each owned half, there could be a lot of issues. The assets and liabilities have to be treated as whole items.

The law does give some protection when a partner depletes the cash. Partners have fiduciary duties to each other that can be enforced. See my post on the Fiduciary Duties of Partners.

Among the fiduciary duties of a partner are the Duty of Care and the Duty of Transparency. These are legally enforceable. Your partner has a responsibility to look out for your interest and the best interest of the business. Certainly, depleting the bank account isn't taking very good care of the business.

It's not easy to get justice. You'll need a lawyer who will take the case, a lot of money to pay fees, and a few years for your case to conclude.

The Partnership Agreement Is the Best Protection Against Unethical Partners

Even though both parties to a 50-50 partnership own all the money, if they sign a Partnership Agreement that says something like, "No partner will take more than $50 from the bank account without the approval of the other partner," then new rules apply. You can add penalty clauses too. If a partner takes money without the other partners consent, that partner could lose rights in the business or be compelled to return the money before receiving any profit distributions. (Or something like that which would serve to discourage taking money without a joint agreement.)

You should also consider having all checks from your business requiring two signatures. And, you can make it known at the bank that both partners need to be present for cash withdrawals. Don't issue Debit cards to the partners. Of course, these measure can be cumbersome, but it's worth the hassles if there is the possibility that your partner is not trustworthy.

Does a Partnership Agreement Help That Much?

YES! If you ever need to seek remedy because your partner has taken a lot of money, the first thing an attorney will ask for (after money!) will be a signed copy of your Partnership Agreement. If there is no PA, then your partner took his money and you are stuck. [Note: Even though the Fiduciary Duties are enforceable, it's very hard to get any traction with a case on that basis.]

What Else to Include in the Partnership Agreement?

There are a lot of things to include in your Partnership Agreement and I'd be happy to discuss those things with you. This post is all about protecting your investment and, ultimately, your business. I recommend including some rules around borrowing from the business so that if a partner takes money without agreement, that money can be treated as a loan. I also like people who put money into a business have that money treated as a loan. If the business sells, the investor can be paid back. And if the business closes, the investor can get some money back.

Is It Too Late to Get a Partnership Agreement?

No. Even if the business has been operating for years, it's a good idea to work through the items that need to be documented for your protection. There are a few items that you might not have previously considered. You can save a lot of grief by getting that agreement done.

Even a Small Business Can Afford It

I offer a package to help you develop your Partnership Agreement. We work together in online meetings and go through all the items that should be included. I give you options and best practices and you massage each item to suit you and your partner. We'll have 2-3 meetings, draft a document, have another meeting to review it, and finally, sign it through DocuSign to make it official. The cost is about 2 hours of what a business attorney charges.

Summary

Don't risk your savings. Don't risk your business. Even if things are already tense and you have no agreement in place, we can talk it through and get your partnership to a much better place.

Just call me.

Chris Reich, Business Partnership Mediator

"Your partner has a responsibility to look out for your interest and the best interest of the business. Certainly, depleting the bank account isn’t taking very good care of the business."