Discovering that a business partner is stealing from the company is a punch to the gut. It’s a violation of trust that threatens not just your relationship, but the solvency of the entire enterprise.
You might see unexplained withdrawals, personal expenses appearing on the company credit card, or vendors you’ve never heard of receiving payments. In New Jersey, this behavior is a severe breach of fiduciary duty, and you have powerful legal rights to stop it and recover the funds.
Is It Theft or Just “Bad Management”?
Legally, you must distinguish between poor decision-making and actual theft (conversion).
- Authorized Compensation: Partners are entitled to their salary or draw. If they take more than agreed, it might be a breach of contract.
- Embezzlement/Conversion: This is when a partner takes company funds for personal use without authorization. Examples include paying for a personal vacation with company funds, creating fake “consulting” fees, or skimming cash receipts.
External Resource: For a broader understanding of how embezzlement is legally defined in a business context, Wikipedia’s entry on Embezzlement provides a good overview of the criminal elements involved.
Your Immediate Right to Information
The moment you suspect foul play, you have the right to inspect the books. Under New Jersey law (specifically the Revised Uniform Limited Liability Company Act for LLCs), members must have access to financial records.
If your partner tries to lock you out of the bank accounts or accounting software, this is a red flag and often a separate legal actionable offense. You may need an emergency injunction to regain access.
Civil vs. Criminal Action
You have two potential paths, and they often run parallel.
1. The Civil Path (The Lawsuit)
This is how you get your money back. You can sue for:
- Breach of Fiduciary Duty: Partners must put the company’s interest above their own. Stealing is the ultimate violation of this.
- Conversion: The civil equivalent of theft.
- Accounting: A court order requiring a full, forensic audit of every penny spent.
We have handled cases involving shareholder disputes where forensic accounting revealed the theft was far deeper than the initial discovery, leading to a much larger recovery for our client.
2. The Criminal Path
Theft is a crime. You can file a police report. However, police often hesitate to get involved in “business disputes,” calling them civil matters. A well-prepared dossier of evidence from your attorney can sometimes convince a prosecutor to take the case, but your primary goal usually is recovering the funds, which is faster achieved through civil litigation.
Freezing the Assets
If you are worried the partner will drain the accounts and flee, you cannot wait for a trial. Your attorney can file for an Order to Show Cause with Temporary Restraints.
This is an emergency court order that can:
- Freeze company bank accounts.
- Prevent the partner from entering the business premises.
- Appoint a “fiscal agent” or receiver to watch the money while the lawsuit proceeds.
The End Game: Expulsion and Dissolution
You likely cannot continue being partners with a thief. Your partnership agreement likely has a “For Cause” expulsion clause. If not, New Jersey statutes allow you to apply to the court for involuntary dissociation of the partner.
This means the court kicks them out. Typically, their share of the business is then valued, and the amount they stole is deducted from what they would have been paid for their shares. In many cases, the theft exceeds the value of their shares, leaving them owing you money.
Don’t Confront Without a Plan
It is tempting to scream at your partner immediately. Don’t.
- Gather Evidence: Download statements, save emails, and copy hard drives first.
- Secure Assets: If you have the authority, limit their access to cash before the confrontation.
- Call a Lawyer: You need to ensure your “lockout” doesn’t give them a legal claim against you for partnership oppression.
Theft doesn’t have to mean the end of your business. With aggressive legal action, you can excise the bad actor and protect what you have built.
