What is Fraud?
When a business partner commits fraud, all involved must take their offensive actions seriously. By definition, fraud involves using business funds for personal reasons. Normally, fraudulent individuals cover up their actions with lies, suggesting they are spending or saving money “for the company.” However, when an individual commits fraud, they behave dishonestly and treat the company as if it is their private bank. Companies cannot tolerate this deceptive behavior whether they use the money for personal reasons or in support of another company.
The key term when identifying fraud is that the partner or director takes the money under pretenses. For example, Paul works at Tickets Direct, a sports ticket agency. Every weekend, Paul reserves expensive tickets to the Golden State Warriors under an assumed name and then attends the game. Of course, Paul doesn’t pay for these tickets, but he tells everyone who asks that free courtside seats are “a part of his job” and an “added perk.
In reality, Paul’s manager does not know he is stealing tickets from the company, and Tickets Direct does not give their employees free or discounted tickets. Therefore, every ticket Paul takes is one less ticket to sell to the masses, and therefore Paul is committing fraud.
Fraud is both a criminal offense and a civil offense, and it can result in repercussions from the business and legal penalties such as arrest and imprisonment.
Business partners must possess evidence to build a fraud case. If an individual or business can document deception or misrepresentation against them, the company, or both, they may have enough proof to support a strong fraud case.
When fraud is suspected, it is essential to consult with an experienced attorney. The attorney will inquire about the amount of money or goods taken and the proof that the wronged partner has collected and build the case from there.
What If A Business Partner Commits Fraud?
Many individuals confuse embezzlement with fraud, so let’s first simplify both definitions.
- Fraud occurs when individuals involved in the business commit deceptive acts to profit from the company. Fraudulent individuals are purposefully dishonest to receive some type of benefit.
- Embezzlement is fraudulent behavior where individuals steal from the company through fraudulent and deceptive behavior.
When a business partner embezzles the company, their actions constitute a serious offense. Individuals who engage in fraud at their companies often steal funds as well. There is often an overlap between fraud, embezzlement, and stealing. These dishonest offenses can quickly damage a business.
Proving that someone committed fraud is contingent upon:
- Proof that the business partner lied on purpose
- Evidence that the other business partner believed the mistruth and relied on it
- Proof that harm was suffered to the individual or business, or both, because of the fraudulent act
How Can Embezzlement be Proven?
Company partners or employees usually commit embezzlement because they are motivated by greed, dishonesty, or both. Often, the most seemingly trusted, responsible, and hardworking employees embezzle from their companies.
The court sometimes treats embezzlement as a criminal matter, and workers who steal in this manner sometimes are convicted and go to prison. However, other embezzlement cases go to civil court, often resulting in a return of the missing funds and a disbarment from the company.
For partners to prove that embezzlement occurred, several factors must come together:
- It must be shown that the accused individual intentionally took the money or property.
- It must be shown that the accused individual owned the stolen property.
- It must be shown that the accused obtained the property or funds based on a fiduciary relationship with the business or victim.
The key in an embezzlement case is to show that one business partner, for example, was involved in a trusting relationship with the other and violated that trust.
If embezzlement occurred, there might also be a case for fraud against an individual or business partner. Ultimately, fraud and embezzlement are often confused because they are usually mutually present. Therefore, let’s go over another important factor in many embezzlement cases: fiduciary duty among business partners.
What is Fiduciary Duty in a Partnership?
When business partners come together to create a partnership, they enter into a trusted agreement. Business partnerships embody several core principles, and one of the most important is that partners cannot intentionally damage the business. In addition, fiduciary responsibility is a duty to the company, implying that the business comes before all else for partners.
Not every business partner chooses to act by their fiduciary duty. Some partners do what is best for themselves instead of first considering the business.
For example, if Jeff and Neil start a small potato chips business called Spuds together, they pledge to each other that the company will always come first. However, after a year of sold profits, Jeff begins to neglect the company and focus on his interests. Instead of networking with new clients, he works on his investments. Instead of spending his time in the office, Jeff spends time building his own new popcorn company, and Spuds suffers. If Jeff continues to act this way, the result will be detrimental to the business because Jeff is not obeying the fiduciary duty he signed up for.
When partners prioritize themselves, their decisions harm the business. Partners share company duties, and business partners should be able to rely on each other when business is excellent and when hard times come along. Partners should not only be aware of their fiduciary duties; these duties should also ensure they support both the business and their partners. When business partners steal from the company, they violate the trust of their partners and the entire company.
For example, Nick and Trevor are partners in a small but profitable law firm in San Diego, California. Trevor routinely grabs a quick sandwich at the deli across the street daily and charges it to the company card.
The minimal expense Trevor places on the company card will not harm the firm; it probably makes Trevor more productive and content. However, if Nick buys a new condo and a new boat with the company card, the law firm could suffer financially. Suppose Nick’s purchases overextend the young firm’s credit, and the business runs out of money.
One of the keys to identifying embezzlement or stealing is to focus on the amount used or taken. For example, when a partner is charged $10 or $20 per day on the company card for lunch and then goes back to work, there is usually no problem. Using a small portion of the business’ funds is not technically a criminal act unless the action damages the business. Deciding whether the partner’s actions are criminal or not hinges on the amount taken.
Why is the Amount the Business Partner Spends Important?
Most of us would agree that stealing is a crime, whether money or goods are stolen from a person or an institution. However, outside of the business world, theft is a black-and-white issue with clear penalties.
However, let’s say two partners in an investment firm have access to the company’s account. Both partners, therefore, have a stake in the business and have worked hard to earn money for the company.
If one business partner uses $15 for lunch daily from the company account, one could argue that they have the right to that money since they have a stake in the company. However, if the other partner buys a $60,000 Ferrari with the company credit, the act could violate company policy.
Partners open themselves up to possible penalties when using significant amounts of the business’ funds. The partner who spends a significant amount will be called upon to justify their actions to the other partners. When the amount is substantial, the concern is that the spending is not only excessive but could prove detrimental to the company.
Sometimes, the key to whether a partner is stealing rests in the partnership agreement. For example, some agreements feature provisions that clearly outline why and how partners can access company accounts. In addition, some partnership agreements define the amounts that can be accessed and the penalties for withdrawing funds without prior consent.
When Should Individuals Sue for Breach of Fiduciary Duty?
When individuals are certain that their partner breached their fiduciary duty and stole money from the company, they should not hesitate to take legal action. Strong businesses are built on respect, ambition, and trust. The business is neither strong nor safe if a partner’s trust is breached.
Fiduciary relationships are at the heart of excellent companies, and violating these duties causes inherent harm to the business. Individuals who take money from the business and use it for their gain breach their partners’ trust.
When partners embark on a business venture together, they accept a specific code of proper conduct and respect. For example, although using small amounts of company money for lunch or dinner is generally acceptable, the business has a problem when a partner takes a significant amount of money and then is dishonest about its purpose.
How Can Individuals Prove That a Partner Embezzled Money?
Proving embezzlement can be a difficult legal challenge. Even when individuals are confident that their business partner stole money, they are not prepared and unsure what to do next.
Most business partnerships afford each partner the lawful right to access and manage the company’s assets. The partnership agreement each partner signs can empower them and limit their abilities to make financial decisions. Therefore, if a partner can prove that the accused partner’s actions violated the partnership agreement, they will also have a much stronger chance to establish that their partner committed a crime.
Some partnership agreements, for example, disallow company partners from using business accounts for personal loans. Other partnership documents include provisions that prohibit partners from making large, personal purchases without the approval of the other partners. When an agreement exists in writing, there is a much better chance of charging an embezzlement business partner. Therefore, if a partner is aware that another partner is stealing, the chances of them successfully charging them increase if there is a partnership agreement.
When a written agreement does not exist, proving wrongdoing becomes exponentially harder. Often, arguments over misuse of company funds descend into “he said, she said” arguments that partners cannot easily resolve.
Whether or not a written partnership agreement exists, it is essential that the partner who suspects theft:
- Collect evidence, including receipts, statements, withdrawal slips, and more
- Ensure that they have copies of financial statements and the business’ books
- Gather proof of the company’s overall expenses and income
Again, the partnership agreement is an important document to reference when theft occurs. However, if no agreement exists, a partner can still prove that embezzlement occurred. Partners must rely on evidence, so make sure to:
- Gather proof in the form of texts, letters, emails, and more
- Discuss the issue with the other partners and ensure that they support the accusation and legal action
- Contact an experienced attorney for an expert opinion on the matter.
Is Terminating the Business Partnership Ever the Right Choice?
Business partnerships often are fueled by optimism at the start, but sometimes they fall apart. Whether the cause of the difficulty is stealing, embezzlement, fraud, or something else, savvy business partners know when to cut their ties and find a new direction.
Ideally, the company can survive when a partner steals from its business. Sometimes, however, it is time to search for a fresh start. Some partners learn that their partner is stealing and decide to dissolve the partnership and move on.
Dissolution occurs when the partners decide to legally terminate the business and bring the partnership to an end. The dissolution process varies by location, but it typically involves submitting the proper paperwork to the correct state office. While dissolving the business can be complicated and time-consuming, it also offers dissatisfied partners a fresh start. Sometimes, entrepreneurs use dissolution as a chance to begin a new journey, such as starting a corporation.
When individuals are concerned about their business partners’ negligent or criminal actions, one of the first things they should do is contact an experienced attorney. At Nakase Wade, our skilled, professional team is here to help.
When Should Individuals Call a California Business Litigation Attorney?
At Nakase Wade, our California business lawyers and corporate attorneys are dedicated to helping clients deal with problematic situations.
If you are struggling with a business partner who is embezzling from the company, we are here for you. Many people wonder what to do when they discover their partner stealing from the company. Often, we speak with concerned individuals who are contemplating:
- How do I know for sure if my partner is stealing?
- How do I charge a partner who is embezzling?
- Will this damage the business?
- Will this harm my career?
We understand your concerns at Nakase Wade and will be with you throughout the process. However, if your partner behaves irresponsibly or commits a crime, you need a lawyer with experience and resolve.
Our attorneys deal with business disputes with a mix of compassion and realism. Our first concern is to ensure that we protect you from your partner’s actions and that your company is safe. Our second priority is ensuring that our client’s rights are maintained and that they can move forward smoothly with their careers and lives.
We will listen to the case details when you contact us and provide support and solutions. If your partner violates your rights or endangers the business, we will work quickly to mitigate any further offenses or damages. When taking your business partner to court, we will be there with you every step, from consultation to the court of law. If you want to try arbitration or mediation, we will answer your questions and ensure that you and your partner are prepared for success.
Our business litigation lawyers and corporate attorneys understand when it makes sense to take legal action and when it makes sense to identify alternate plans. No question about embezzlement being too large or small, and our goal stays the same: to defend the interests of our clients.
Contact Nakase Wade today for a free consultation. We understand business disputes, and we want you to understand your rights. If your partner is embezzling from the company, you must act immediately to save your interests, time, and business career.
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