Discovering that a person you trusted to help build your legacy is instead siphoning off its value is a profound professional and personal crisis. Whether it involves the direct embezzlement of cash, the unauthorized use of company credit cards, or the diversion of lucrative contracts to a secret side business, internal theft threatens the very survival of your enterprise.
When a business partner is stealing from the company, the actions you take in the first few days of discovery may determine whether the business survives the fallout.
Our firm focuses on helping entrepreneurs navigate these high-stakes disputes with a strategic, agile approach. We understand that your business represents years of hard work, capital investment, and vision.
Protecting that investment requires a clear-eyed assessment of your legal rights and a methodical plan to stop the bleeding while preserving the company’s reputation.
A thief in the midst:
- California law imposes strict fiduciary duties on partners, making theft a clear breach of legal obligations.
- Immediate "self-help" measures, such as locking a partner out without legal authority, may create additional liability for you.
- Detailed financial documentation and forensic audits serve as the primary evidence in partnership theft litigation.
- A well-drafted partnership agreement may provide specific "for-cause" removal procedures that streamline the dissociation process.
- Acting quickly to secure digital evidence and financial accounts helps mitigate ongoing losses and strengthens a future claim.
Identifying the Signs of a Business Partner Stealing from the Company
Theft within a partnership is rarely a one-time event that is easy to spot. More often, it is a gradual process where a partner slowly begins to treat company assets as their own. Recognizing the early warning signs is critical, especially before disputes escalate to the point where a business partner sues you, allowing you to intervene before the financial damage becomes irreparable.
Financial inconsistencies and irregularities
Discrepancies in accounting records are often the first tangible sign that something is wrong. You might notice small, frequent miscellaneous expenses that do not align with the company's usual operations.
Sometimes, the theft is hidden in plain sight through inflated expense reports or payments to vendors that do not appear to provide any actual services to the firm.
Behavioral changes and increased secrecy
A partner who was previously transparent about the books might suddenly become defensive or restrictive regarding access to financial data. If a partner insists on handling all interactions with the bookkeeper personally or refuses to share passwords to accounting software, it may indicate they are trying to hide a trail of misconduct. This shift in behavior often coincides with a partner working unusual hours or becoming increasingly isolated from the rest of the leadership team.
Unexplained vendor or client relationships
In some cases, the theft does not involve taking cash out of the register but rather diverting the goodwill of the business. You might find that a partner has established a separate entity and is encouraging company clients to move their business there. This theft of business opportunity is a common issue in medical practices and tech startups, where individual relationships are highly valuable.
Legal Protections for Victims of Partnership Theft
When you enter into a partnership in California, you are entering into a relationship governed by specific legal standards. These standards exist to protect the entity from the misconduct of a single individual. Understanding these protections is the first step in holding a wayward partner accountable.
The duty of loyalty
The duty of loyalty is perhaps the most fundamental obligation in a business relationship. It requires every partner to act in the best interests of the partnership and to refrain from competing with the company or taking advantage of its opportunities for personal gain.
When a business partner is stealing from the company, they are actively working against the entity, which constitutes a severe violation of this duty.
The duty of care
Partners also owe a duty of care, which requires them to act with the same level of diligence and skill that a reasonably prudent person would use in a similar position. While this often applies to negligence, it also covers reckless conduct.
A partner who treats the company treasury as a personal piggy bank is failing to exercise the care necessary to protect the partnership’s assets and its creditors.
Breach of fiduciary duty litigation
In California, a breach of fiduciary duty claim is a powerful tool for addressing internal theft. This type of litigation allows the aggrieved partner to pursue various remedies, including the return of stolen funds, the forfeiture of profits made through competing ventures, and in some cases, punitive damages.
We analyze the specific facts of each case to determine the most effective way to present these claims in court.
Strategic Steps When You Suspect Misconduct
If you suspect your partner is acting dishonestly, your initial reaction might be to confront them immediately. However, a premature confrontation may give the partner time to delete evidence or further hide assets. A more strategic approach involves gathering information quietly before taking formal legal action.
Gathering initial evidence
Before making an accusation, it is helpful to compile as much documentation as possible. This includes bank statements, credit card bills, tax filings, and internal communications. If the business uses digital project management or accounting tools, exporting activity logs can help establish a timeline of when unauthorized changes or withdrawals occurred.
Forensic accounting audits
In complex cases involving high-revenue businesses, a standard review of the books might not be enough. Engaging a forensic accountant may help uncover sophisticated schemes, such as "ghost" employees or convoluted shell company transactions. These professionals provide a detailed report that serves as a cornerstone of your evidence if the matter proceeds to trial.
Reviewing the partnership agreement
The partnership agreement is the law of your business. We carefully examine these documents to see if they contain specific definitions of misconduct or theft and what the agreed-upon remedies are.
Some agreements have specific buy-sell provisions that are triggered by a partner’s breach of contract, providing a clearer path to removing the individual from the company.
Internal Safeguards to Protect Company Assets
Taking immediate steps to prevent further loss is essential while you evaluate your long-term legal options. These internal measures help stabilize the company's finances and send a clear signal that the misconduct has been detected.
Protecting the company's remaining resources requires a methodical approach to financial oversight and access control. Consider implementing the following safeguards to mitigate the impact of the theft:
- Change the passwords for all primary banking and credit card portals.
- Notify the company’s bank that any transaction over a certain dollar amount requires dual signatures from all partners.
- Update access permissions for sensitive company data and intellectual property folders.
- Review and potentially suspend the partner’s authority to enter into new contracts or debt obligations on behalf of the company.
- Inform the company’s CPA or bookkeeper of the investigation and request that all future financial reports be sent directly to your attention.
Establishing these controls helps prevent the partner from making a "final sweep" of the accounts once they realize they are under scrutiny. Once these protections are in place, the business can continue to function while the legal process moves forward.
Pursuing a Legal Remedy in California
California law provides several mechanisms for resolving a partnership dispute involving theft. The choice of remedy depends on whether you wish to save the business, buy out the partner, or dissolve the entity entirely decisions that are best evaluated with guidance from a partnership disputes lawyer who understands California business law.
Involuntary dissociation
Dissociation is the legal term for a partner leaving the business. If the partnership agreement does not provide a path for removal, the California Revised Uniform Partnership Act allows a partner to be dissociated by a court order.
This is often the preferred route when the remaining partners want to keep the business operational but need to legally sever ties with the dishonest partner.
Judicial dissolution
If the theft has been so extensive that the business is no longer viable, or if the partners are hopelessly deadlocked, judicial dissolution may be necessary. In this scenario, a court oversees the winding up of the business, the sale of assets, and the distribution of proceeds.
This ensures that the process is handled fairly and that the partner who stole does not receive an inequitable share of the remaining value.
Temporary restraining orders (TROs)
In urgent situations where a partner is actively draining accounts or destroying records, we may seek a Temporary Restraining Order or a preliminary injunction. These court orders can immediately freeze assets or prevent a partner from entering the business premises. This is a critical tool for stopping a scorched earth strategy by a partner who knows their exit is imminent.
FAQ for Business Partner Is Stealing From the Company
Can I be held liable for my partner's theft?
In many partnership structures, partners may be held "jointly and severally" liable for the debts and obligations of the business. If your partner stole from a client or a creditor, you might be legally responsible for the loss. This is why it is essential to act quickly to document that the theft was unauthorized and that you took immediate steps to stop it.
What is the difference between theft and a draw?
A partner's draw is a legitimate distribution of profits as allowed by the partnership agreement. Theft involves taking funds without authorization, outside of the agreed-upon distribution schedule, or for personal expenses that are not business-related. Distinguishing between a sloppy accounting practice and intentional theft is a key part of the investigation.
Can I sue my partner for the emotional stress of the theft?
Business litigation in California typically focuses on economic damages rather than emotional distress. While the betrayal is deeply personal, the courts primarily consider the financial loss to the company and its partners—an area where a skilled business litigation lawyer can help quantify damages and present a strong financial case.
However, if the theft involved fraud or intentional misconduct, punitive damages might be an option to address the severity of the partner's actions.
Does the firm handle disputes for businesses outside of Los Angeles?
Yes, our firm assists business owners who are doing business in California, regardless of where they are physically located. As long as the business operations or the partnership agreement fall under California jurisdiction, we can provide the strategic guidance needed to resolve the conflict.
How long does it take to remove a partner for stealing?
The timeline varies depending on the complexity of the theft and whether the partner contests the allegations. A resolution through a negotiated buyout in business partnership disputes might take a few months, while a fully litigated judicial dissociation could take a year or longer. Using a proactive strategy helps move the process along as efficiently as possible.
Moving Toward a Secure Future
Facing a partnership dispute is one of the most taxing experiences an entrepreneur can endure. The uncertainty of the legal process, combined with the financial stakes involved, can feel overwhelming.
However, you do not have to navigate this transition alone. By shifting the focus from the betrayal to a strategic plan for recovery, you can protect the business you have built and the legacy you intend to leave behind.
Focusing on the long-term health of your company allows you to make decisions that are not based on emotion, but on what is best for your employees, your clients, and your future. Taking action today is the first step toward a more stable and successful tomorrow.
Contact the Law Office of Parag L. Amin, P.C. to discuss your options and begin the process of protecting your business from internal misconduct.