BUSINESS OWNERS AND PARTNERS SHOULD BE PARANOID

Fox Moulder’s motto was “Trust No One.”  Lawyers can understand this paranoia.  Divorce lawyers know spouses cheat. Criminal lawyers know clients steal (and worse).  You should know that your business partners and key employees that you trust the most can betray you.  This includes both majority and minority shareholders in close corporations, members of LLC’s (Massachusetts limited liability companies), and partners in partnerships.  Sadly, this also includes family members in a family business. 

I refer to all such persons as “partners,” because that is how people generally think of one another.  The term itself, partner, holds a special meaning of trust to the business person, as it should.  It’s no coincidence that the word also means a person with whom one has an intimate relationship, also founded on trust.

Trust may work fine for you, but don’t trust blindly. Someone reading this blog has a partner who is cheating them.  The obvious form of this is that the cheating partner is taking more than his or her share from the business.  He is paying his car payments from the company accounts while you pay for your own car.  She secretly increased her salary without informing you. Maybe’s he’s paying for his mistress’ apartment.  Or his cocaine addiction.  Or gambling.  Or her son’s college tuition. Maybe he’s going on shopping sprees with the company credit cards.  Maybe she fires you when you complain.  Or cuts your salary and forces you out.  This is a classic freeze out.

Sometimes the partner who is not in charge of the books can cheat as well.  By submitting false expenses. By moonlighting. By directing the business to his own secret company or a friend’s company.  By taking the customer’s payments.  By preparing to leave and start a competing business.  Maybe both of you are cheating the other in your own way.

I’ve seen all of these things, and much more happen.  It’s human nature to be tempted in financial matters.  It’s easy to tell yourself that you deserve it because you work hard. Your partner is lucky to have you.  Or to tell yourself that you’ll pay back the money next month.  There is always some justification.  

If you sense something is wrong, it probably is.  If you nip small things in the bud, you may be able to save the business.  Get involved in all aspects of the business.  You need access to the company books and financial records on a regular basis.  You generally have a right to this information.  If you let things go for too long, it may be too late to save your company.

If you discover that your partner has cheated you in some way or the other, you do have legal recourse.  That’s true even if you are not 100% clean yourself. Start to take control of the situation by addressing it directly.

Adam P. Whitney

617.338.7000

[email protected]

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.