Whether a partnership is between two people, two businesses, or between an individual and a business, if an individual removes assets illegally from a business for personal gain, it is stealing.
Below, we address different types of business theft and what to do if you suspect a business partner is stealing from you.
Types of Business Partner Theft
Embezzlement by Business Partners
Embezzlement occurs when a business partner wrongfully takes money or property that has been entrusted to their care but is owned by the business or other partners. Unlike outright theft, embezzlement involves misappropriation by someone in a position of trust who has legal access to assets but not ownership.
Common forms of embezzlement by business partners include:
- Skimming revenue before it's recorded in the company books
- Creating fictitious expenses or vendors and diverting payments
- Manipulating accounting records to hide misappropriation of funds
- Unauthorized transfers from business accounts to personal accounts
- Double reimbursement schemes for business expenses
Embezzlement by a business partner is particularly damaging because it combines financial loss with a fundamental breach of trust.
Fraud and Misrepresentation
Business partner fraud involves deliberately deceiving partners through false statements or concealing material information for personal gain. Unlike embezzlement, which involves misappropriating existing assets, fraud often involves manipulating partners into actions they wouldn't otherwise take.
Examples of partner fraud include:
- Financial statement fraud: Falsifying company financial records to hide losses or inflate profits
- Contractual fraud: Inducing partners to enter agreements based on false premises
- Investment fraud: Soliciting additional capital based on misrepresented business opportunities
- Customer or client fraud: Diverting business opportunities to a separate entity owned by the partner
- Insurance or benefits fraud: Filing false claims using business resources
To establish fraud in Texas, you must prove that your partner knowingly made false representations of material facts with the intent to induce action, resulting in damages. Successful fraud claims can result in recovery of both actual and exemplary (punitive) damages.
Intellectual Property Theft by Partners
Intellectual property (IP) theft occurs when a business partner misappropriates the company's intangible assets. This form of theft can be particularly devastating as it may damage the company's competitive advantage or future revenue potential.
Types of intellectual property theft include:
- Trade secret misappropriation: Taking and using confidential business information like customer lists, proprietary formulas, or manufacturing processes for purposes other than company business
- Copyright infringement: Unauthorized use of company-owned creative works
- Trademark theft: Improper use of the company's brand assets or goodwill
- Patent infringement: Using protected inventions without authorization
- Software or data theft: Copying proprietary code or company databases
In Texas, misappropriation of trade secrets is governed by the Texas Uniform Trade Secrets Act, which provides robust remedies including injunctive relief, damages for actual loss, and potentially additional damages for willful and malicious misappropriation.
Taking Money Without Permission
When a business partner takes money without proper authorization, it constitutes a serious breach of fiduciary duty, even if they believe they're entitled to those funds. This differs from formal embezzlement schemes in that it may be more opportunistic or based on their interpretations of partner rights.
Examples include:
- Excessive salary or bonus payments without proper approval
- Unauthorized loans from the business to the partner
- Diverting business opportunities or clients to personal ventures
- Using company credit cards or accounts for personal expenses
- Withdrawing capital beyond allowed distributions
Even if your partnership agreement permits certain withdrawals, a partner who exceeds authorized amounts or circumvents established approval processes is violating their duties to the business and other partners. Texas law imposes strict fiduciary duties on business partners, requiring them to act with the utmost good faith and loyalty toward the partnership.
Warning Signs of Business Partner Theft
Compare your business partner’s actions with these common warning signs of embezzlement and theft.
Lack of Financial Transparency
Is your business partner:
- Refusing to share financial records or provide access to accounting systems?
- Consistently delaying financial reporting or providing incomplete documentation?
- Defensive when questioned about finances?
- Doctoring documents? (Look for discrepancies in versions of financial records.)
Restricting Access to Bank Accounts and Financial Systems
Is your business partner:
- Changing account passwords without notification?
- Redirecting company deposits to unauthorized accounts?
- Insisting on exclusive control of banking activities?
Nepotism and Suspicious Hiring Practices
Is your business partner:
- Hiring family members without proper vetting or clear qualifications?
- Paying relatives disproportionately high salaries?
- Compensating family members for full-time employment even though they rarely appear at work?
- Ordering services or supplies from family-owned vendors without authorization?
Unusual Cash Flow Patterns
Is your business partner:
- Unable to explain cash shortages or insufficient account balances?
- Making excessive or undocumented cash transactions?
- Diverting payments to new or unfamiliar vendors?
- Charging personal expenses to company accounts?
Lifestyle Changes Disproportionate to Income
Is your business partner:
- Buying property or luxury items?
- Investing in other ventures with no clear source of funding?
- Suddenly debt-free?
If so, document suspicious activity, and contact the business litigation attorneys at Hendershot Cowart P.C. immediately.
Can I Sue My Business Partner for Stealing from the Company?
Yes, you can sue your business partner for stealing from the company.
There are several legal grounds on which you can base your lawsuit:
- Breach of Fiduciary Duty. Business partners typically owe each other fiduciary duties of loyalty, care, and good faith. Taking company money or assets for personal use clearly violates these duties. This is often the strongest legal claim in partner theft cases.
- Civil Theft or “Conversion”. This legal claim applies when a partner wrongfully takes or retains business assets.
- Fraud. If your partner deliberately misrepresented facts or concealed information to facilitate the theft, you may have a fraud claim. This often involves manipulation of financial records or misrepresentations about business transactions.
- Breach of Contract. Partnership agreements typically prohibit partners from taking company assets. Violating these provisions constitutes a breach of contract.
- Embezzlement. This is a specific type of theft where someone misappropriates assets entrusted to their care and often involves a pattern of small thefts over time, sometimes with increasing frequency and in increasing amounts.
Immediate Steps to Take If You Suspect Partner Theft
Once you suspect or uncover potential theft, take action immediately to secure business assets and build a strong case.
Consider these steps to stop business partner theft:
- Gather Evidence. Collect financial records, bank statements, and any documentation showing unauthorized withdrawals. Secure emails, texts, or other communications that might reveal theft. Your attorney may recommend hiring a forensic accountant to trace missing funds.
- Consult with an Attorney. Work with a business litigation attorney experienced in partnership disputes. They can help assess the strength of your case and recommend the best course of action, including ways to protect remaining business assets. Hendershot Cowart P.C. has been litigating and resolving these kinds of partnership disputes since 1987.
- Demand for Inspection of Books and Records. Under Texas law, LLC members and corporate shareholders have a right to examine the entity's books and records. Sending a formal demand can help confirm your suspicions and demonstrates to the courts that you attempted to investigate potential misconduct before taking more severe legal action.
- Explore Alternative Dispute Resolution. Mediation or arbitration might resolve the dispute more quickly and cost-effectively than litigation. If you have a partnership agreement in place, mediation or arbitration may be mandated.
- Request Injunctive Relief. An injunction is a court order to stop specific actions. If the theft by your partner is causing immediate harm, your attorney may recommend that you file a lawsuit and petition the court for a temporary restraining order (TRO) to immediately put a stop to business theft.
- Sue for Damages. A successful lawsuit will typically result in a monetary judgment against your partner, which could include the actual value of stolen funds, attorney’s fees (depending on the legal claim), punitive damages, and the removal of your partner from management of the business.
- File Derivative Action. If the theft harmed the business and not your interests personally, you can sue on behalf of the company in what is called a “derivative action”. If you prevail, any assets or damages recovered are returned to the business.
Stop Business Partner Fraud and Theft with Experienced Legal Counsel
If you suspect your business partner is stealing money, embezzling funds, or committing fraud, immediate legal action is crucial to protect your interests. Our experienced business theft attorneys can help you gather evidence, stop ongoing theft, and recover stolen assets.
Contact Hendershot Cowart P.C. online or call (713) 783-3110 today for a confidential consultation about business partner theft.