Legal Question in Business Law in California

Theft of company funds by business partner

Recently I discovered when going through the books of our company (something I unfortunately only do every 12-18 months) that my business parter has used in excess of $100,000 to pay for home improvements. He also increased his life insurance policy (company paid for both of us) by $500,000. All of course without uttering a peep to me. We have had an ongoing agreement to pay for personal items (home theater etc) with company funds, verbally going back and forth when we have done this as a measure of equality to the tune of 10k each per year. To add to the insult, there is the case of compensation which we both verbally agreed to be equal when we started our company a decade ago. Just pulled the files to perform 401k contributions and surpise ... paid himself $30k more last year.

Question here, legally when/if push comes to shove - is there the matter of equal culpability with regards to dirty hands? This matter certainly needs to be addressed.

He owns 62%, I own 38%, so there is the fear factor of him saying get bent, stop paying me and I am out forced to start over (do have a buy/sell agreement so there is some decency to ending).

Please advise legal options/best course of action.


Asked on 4/06/06, 1:10 am

3 Answers from Attorneys
Michael Stone Law Offices of Michael B. Stone Toll Free 1-855-USE-MIKE

Re: Theft of company funds by business partner

1. Why are you using a partnership as your form of business organization?

2. Why are you relying on verbal agreements?

3. Why haven't you called a lawyer and made an appointment?

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Answered on 4/06/06, 1:14 am
Amy Ghosh Law Offices of Amy Ghosh

Re: Theft of company funds by business partner

You should at least have a Memorandum of Understanding (MOU) with your partner. In that MOU all these issues should be addressed. Then you should confront him about the overpayment to himself.

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Answered on 4/06/06, 9:33 am
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Theft of company funds by business partner

Is the business truly a partnership? The answers that follow would be somewhat different if the business is incorporated or is an LLC.

Partners own one another a high degree of ethical conduct...they are in a fiduciary relationship with each other and with the partnership. The fiduciary duties include a duty of care and a duty of loyalty. Your partner has breached these duties.

What's happened would probably be embezzlement in a criminal action (brought by the D.A.), but there is no private right of action for embezzlement as such. Instead, your potential civil causes of action would bear names such as breach of fiduciary duty, conversion and fraud.

The appropriate action depends upon several factors not discussed (and perhaps not easily conveyed) in a BBS posting. These include how profitable the business is, whether the relationship with the partner is irreparably harmed by these transgressions, and how essential you each are to the future of the business. A suit would be disruptive and probably would be fatal to the partnership and perhaps to the business itself.

Partners who misbehave may lose rights, so the 62-38 equity split doesn't necessarily mean that you have less power over the future of the partnership.

Obviously, you need to consult with an experienced business lawyer -- one who understands the California Revised Partnership Act -- as soon as possible.

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Answered on 4/06/06, 2:41 pm


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