Legal Question in Business Law in California

Re: co-mingling funds?

How to stop it? With common sense. Terminate the guy's access to the accounts and/or terminate him per the company bylaws and policies, and sue him and/or file criminal charges if necessary to recover the money if it was fraudulently taken. It may require he be bought out. Consult with counsel if you need to feel more comfortable about how to do so.

Re: co-mingling funds?

I suggest referring the individual to Corporations Code section 315(a) which says "A corporation shall not make any loan of money or property to, or guarantee the obligation of, any director or officer of the corporation, or of its parent, unless the transaction........is approved by a majority of its shareholders entitled to act thereon."

Similar laws affect unauthorized gifts, dividends, and other distributions of corporate money or property.

Salaries, fringe benefits, etc. are not normally payable to persons who serve only as directors; directors can be reimbursed for expenses, but that's it. While officers can be compensated (as we all know), their compensation should be approved by the board of directors or a committee of the board (the "compensation committee") authorized by the full board to deal with officer compensation matters.

What this guy is doing is illegal. You might want to look up the balance of section 315 as well as Corporations Code section 316 discussing the rights and remedies of the corporation and its other shareholders against someone who is dipping into the corporate treasury without majority approval.

Re: co-mingling funds?

A good start would be a cease and desist letter to be signed by the three other owners indicating that the cash needs to be accounted for and setting a policy regarding future behavior. You don't have to be the "bad guy" when legitimately requesting an accounting and receipts (as opposed to making bald accusations of mismanagement and misappropriation). Obviously, there may be additional information not included in your post that have lead you to this suspicion. Depending on the response to these preliminary efforts (and other information you may have), you will have to determine whether this one owner can be trusted. If you decide there is an unacceptable risk of recurring problems, you may need to consider a buy out (check corporate organizational documents regarding this strategy) and/or whether other legal action may be appropriate (e.g. restraining order, lawsuit, etc.). Please note that the response that is possible given the limited information of postings in this forum makes it impossible to give comprehensive legal advise and an attorney-client relationship is not created. It would be advisable to consult with an attorney who can fully review the situation to determine the best strategy and your options based on various response scenarios.