Can a business partner taking money without permission?

Unless otherwise stated in the partnership agreement, the rule is that the business partner has equal rights to manage and operate the business. A business partner may not take money for use on personal benefits without permission.

My Business Partner Withdraw Funds Without My Consent, Example

Manny and Theo are partners in a small investment firm in Oceanside, California. While business is proceeding smoothly, Theo has a problem: Manny goes out to lunch every day on the company dime, and it is beginning to add up.

Of course, Theo and Manny both have equal access to their company credit card, so Theo can view Manny’s transactions. Four to five times a week, Manny goes over to Joe’s Sandwich shop and spends $15-20 on lunch. Manny’s spending adds up, Theo realizes, to nearly $100 per week. As he adds up the company’s profits for the last quarter, Theo can’t help but wonder: is what his partner is doing defined as stealing from the business?

After a few months of this, Theo confronts Manny. Manny is honest about his new routine, and says that Joe’s supplies his “brain food.” One, Manny says, he isn’t spending much, and two, he pays off the credit card each month. Finally, Manny calls Theo’s concerns foolish and invites Theo to join him at Joe’s next week, where the turkey sandwiches are “out of this world.”

Which partner is correct in this situation? Is Manny stealing from the company he has worked so hard to create, or is Theo overreaching?

Many business partners wonder what defines the act of stealing from the company. We receive many questions from clients: can my company partner withdraw money without my knowledge? Surprisingly, the answer to this question is not black and white and is more complex than many would imagine. In this article, we will define the terms of stealing from one’s partner and identify what business partners should do when the event happens.

How Does One Know if Their Business Partner is Stealing?

Dishonest business partners surely exist, and some even steal from each other. However, when one partner spends $20 per day for lunch, it is technically not stealing. If it is not a criminal act, then how can we define this action?

Labeling a business partner a “thief” seems dramatic. Yet, this label also oversimplifies what a fairly complicated problem is. One important aspect of many of these situations is that one partner acts without the knowledge of the other. However, even if one business partner withdraws money from the company account for lunch or uses the company card for another personal reason, this act is not stealing. While acting in this way without the consent of the other partner or partners may prove problematic, it is not a crime, or an example of embezzlement or fraud. However, then how can these acts be identified and labeled?

When partners disagree over the use of company money, problems are bound to arise. One way to answer these important questions about the nature of stealing is to identify the amount taken. The amount of money that the partner in question spends tells us the nature of the offense.

Why is the Amount the Business Partner Spends Important?

In society, stealing from a person or an institution is a crime, regardless of the amount. While the amount stolen dictates the severity of the offense and the punishment, the act of stealing outside the parameters of the business world is a black-and-white issue.

However, let’s say two partners have access to the company’s account. Both partners have worked hard to earn money, and they have a “stake” in the account. Credit options and bank accounts included, all partners are usually able to access the company’s funds.

However, the amount of money that is withdrawn or debited, or the amount of credit used, is essential in figuring out the severity of the offense. If one business partner uses $20 for lunch each day from the company account, one could make the argument that they have the right to that money, since it is their company. However, if another partner buys a $70,000 Tesla with the company credit, the act will not only raise a few eyebrows it could also violate company policy. When using significant amounts of the business’ funds, partners open themselves up to suspicion and possible penalties; the partners therefore must be open about their reasoning and justify their actions to the other partners.

When business partners form a company, they create a partnership agreement. In some cases, the key to the question of whether a partner is stealing rests in the agreement. For example, some agreements feature provisions that clearly outline why and how partners can access company accounts. Some partnership agreements even stipulate the amounts that can be accessed and what the penalties are for withdrawing funds without prior consent.

For Limited Liability Companies, the same answers are found in the operating agreement that the owners draw up.

There are four central deciding factors regarding whether a business partner abuses his or her monetary privileges. These next four categories will help individuals decide whether their partners are stealing from the company or using the money they have worked for so diligently.

The Money Damaged the Company

One of the most fundamental principles in business law is that a partner is not allowed to harm the business. This core principle is called fiduciary responsibility.

Fiduciary duties are violated when one partner does what is best for themselves instead of doing what is best for the business first. For example, when business partners pledge that the business comes first when they come together to create a business. Sometimes, however, business partners place themselves before the business. When partners prioritize themselves, usually their actions are bad for business.

Business partners must be able to rely on one another to support the business and each other. If a partner damages the company in any way, they are violating their fiduciary responsibility and breaching their partners’ trust.

Therefore, if one partner in a successful law firm uses the company card for a sandwich each day, the business will probably remain healthy and unharmed. However, if the other partner purchases a house and a car on the company card and overextends the business’ credit, the business could suffer financially. Therefore, using some of the company’s money is not a criminal act—unless the action harms the business. Usually, the amount of the money taken dictates whether the business suffers or not.

The Business Partner Took Under False Pretenses

When partners use company funds but then lie about the reasoning, this creates a problem. For example, let’s say that Vivian and Donte run a balloon stand in Redondo Beach, California. One day, Donte tells Vivian that their air compressor—a valuable tool in their business—is broken, and Donte volunteers to fix it. Donte withdraws $5,000 to cover the cost of a new air compressor.

However, the next day, Vivian finds Donte using the same old piece of equipment. Donte tells Vivian that he was able to fix the air compressor himself free of charge. When Vivian asks what Donte did with the money, he tells her that he put it back into the account. Later in the day, when Vivian checks the books, she finds out that Donte did not return the money. Later, Vivian finds out that Donte bought a new car with the money, and that the air compressor was never broken.

Donte’s unethical actions constitute fraud. Donte is effectively stealing from the company, and since the amount is significant enough ($5,000), Vivian should pursue a lawsuit against Donte.

If a business partner takes money from the company and then lies about the reason, they are not only being dishonest, they are also stealing.

The Amount of Money Taken was Excessive

When a business partner withdraws $50 from the company account in order to take a taxi to the airport or uses $60 of credit on the company card for a quick dinner between meetings, these acts are usually accepted without much fanfare. After all, most business partners are busy and constantly on the move, regardless of the industry, and even more importantly, these amounts are fairly minuscule.

The amount that a business partner withdraws is the main factor in deciding if they have violated the other partner’s trust. The amount also is subjective, based on the size and wealth of the business. If Pete and Pria run a small pizza place in Cardiff, California, and Pria withdraws $900 without letting Pete know, Pete will probably react negatively. The two triggers are the amount—$900 is a lot for a small business—and the fact that Pria did not let Pete know.

If Pete finds out that Pria used the $900 on herself, and bought a new purse, for example, he has a right to speak to Pria, find out what is going on, and remedy the situation.

However, if Pria tells Pete that the oven broke on her shift and the $900 went directly to the repair person, then the issue might be easy to overcome. Perhaps Pete and Pria will agree that for certain amounts (let’s say, over $200 for the sake of this example), they must let each other know the reason for spending.

When a business partner regularly uses $10 of company cash for a sandwich during the week, they are not violating their fiduciary responsibility based on the low amount. Therefore, partners who question their counterparts’ actions cannot overlook the importance of the amount spent. When in doubt, entrepreneurs who are concerned with the spending of their partners should consider these questions when calculating the severity of the offense:

Was the amount taken unnecessary and disproportionate?
Did the amount harm the company?

If you are concerned with your business partner’s spending habits, the best thing to do is to speak with them immediately, rather than putting the conversation off. Remember, it is very difficult to take a business partner to court for borrowing a small amount of money, even if they do not clear it with you, or the business, first.

The Partner’s Intent was Malicious

We can tell a lot about a business partner’s actions based on one important word: intent. When a partner withdraws funds, it is important to consider the following:

What they spent the money on
What their intent was in taking the money out, and spending it

For example, Beth and Brian are siblings who own a ski rental business in Mammoth Lakes, California called “Double Trouble.” One week, Brian notices that Beth begins repeatedly withdrawing money in relatively small amounts.

If Beth is simple eating lunch or dealing with business-related expenses, that is one thing. But if Beth and Brian are not getting along and Beth is purposefully trying to drain the business of money, that is another issue entirely. For example, perhaps Beth’s plan is to take money in small amounts so Brian does not react, but do so until she has enough money to open her own business. Or, perhaps she is just sick of working in the ski industry and wants the company to fail.

If Beth’s intent is malicious, then Brian may be able to take her to court. Of course, the amount of the withdrawals is also vital to consider, but Beth’s intentions are just as important.

If Beth is simply using the money for snacks as she works long hours in the ski shop, or buying new equipment for the shop, that is a different issue entirely.

All of these situations are complex because of the element of subjectivity. Therefore, when one partner is unsure of their financial actions, they should document them. Keeping track of a partner’s transactions may help sort things out later.

How Significant is Fraud Among Business Partners?

When one business partner commits fraud, they have perpetrated a grave offense that must be taken seriously. Fraud can take various forms in a partnership, including:

Using company money for personal reasons
Using company money for a different business

However, they key to identifying fraud is that the partner takes the money under the guise of using it “for the company.” Therefore, when one partner sees dishonest motives behind the other partner’s actions, they may be noting an example of fraud.

Fraud is:

A criminal offense
A civil offense

Fraud can result in:

Imprisonment
Damages

When business partners can document deception or misrepresentation against them, the business, or both, they probably have enough evidence to build a strong fraud case. When fraud is suspected, we suggest contacting an experienced attorney for a consultation. The attorney will ask about the amount of the money taken, the conditions, and the proof that the wronged partner has and go from there.

How Can a Partnership Agreement Help?

When partners join together to create a new business, they draft up a partnership agreement to organize the business, define partners’ roles, and delegate authority. These documents provide the foundation of most businesses. When forming an LLC, the process is similar but the standard document is called an operating agreement.

Partnership agreements allow partners to add specific provisions, so why not use the agreement to set rules for spending money? Within a partnership agreement, the founding partners can:

Set limits on spending
Require communication or mutual comprehension before spending certain amounts
Prohibit discretionary spending
Establish penalties for fraud

If the partnership agreement covers spending, it makes issues easier to deal with if they arise. For example, if a partner violates one of these provisions, then they breach the contract. If they are in breach of a contract, then that is an enforceable offense.

For example, let’s say one partner, named Teddy, repeatedly exceeds the spending limit found in the partnership agreement. When the other business partners meet with him and urge him to stop, he refuses to. At this point, the other partners can contact an attorney, because Teddy breached the contract and this is an enforceable offense. While all cases turn out differently, the attorney in this case will have much more authority based on the partnership agreement.

Breaking the Partnership Agreement

If one partner continues to breach the partnership agreement, the other partner has options. They can:

Force the individual into a “silent role” in the business
Leave the partnership
Remove the partner

Removing the partner depends on the gravity of the offense. For example, if a partner will not sign the partnership agreement or agree to the terms, that act too can provoke their removal from the company.

Can a Business Partner Take Money Without Permission?

Contrary to popular belief, it is not illegal for business partners to use company money for personal reasons. These cases are often complex, and the decision regarding the severity of the offense depends on key factors, including:

What the money is used for
What the partner contends the money is used for
How much money the partner used

If a business partner borrows $10 for lunch, it does not make sense to contact an attorney however, if the same business partner spends $3000 on the company credit card and lies about the reason why their partner should contact an attorney about the offense.

Violating a company’s partnership agreement is also grounds for an enforceable offense, and when this occurs, the aggrieved party should contact a lawyer.

When Should a Business Partner Contact an Attorney?

When business partners sign a partnership agreement and create a new business, they do not expect to deal with spending issues. Sometimes, partnership agreements do not include provisions about spending is that at the start, business partners are filled with optimism and do not expect adversity to find them.

However, personal problems and financial issues often arise in the business world. Sometimes partners become greedy or resentful, and other times they are simply careless with their spending.

It is vital for all business partners across all industries to understand their legal options if a business partner withdraws funds without the consent of the other partners. There is nothing worse than being unprepared when faced with, for example, a partner who decides to act negligently, breach an agreement, or even commit fraud. For example, a significant problem may exist when a business partner suddenly begins spending exorbitant amounts of company profits.

Knowledge is power, and we want our clients to understand that they have rights when their partners do not act honorably. At Nakase Wade, we have represented numerous businesses and individuals seeking to take legal action against their partners. Our experienced business lawyers and corporate attorneys are skilled and professional, and we will listen to the facts of the situation and explain your rights.

If you have questions about business partner’s inappropriate spending, or are wondering if a partner’s offense is enforceable, contact our California business attorneys. We offer free consultations and will quickly begin helping you get back on track with your business goals.

Do not let a business partner’s errant spending damage the company you have worked so hard to build, or disrupt your life. Contact Nakase Wade today.

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