Every couple months, I get a call from a business owner saying, ‘My business partner is stealing from the business, what do I do?’ I shudder knowing that it will be sometime before their life returns to ‘normal’. It is helpful to know what recourse a business owner has in the awful event that their business partner is stealing from them. However, finding a solution will largely depend on how difficult your business partner is and how your business is structured.
Types of Business Structures
In Ontario, there are generally three types of business structures that you may choose to register. These structures are a sole proprietorship, partnership, and incorporation.
A sole proprietorship means that you are the sole owner of your business. As such, you cannot have a business partner but rather an employee. If you have an employee that is stealing from your business and you can prove they are stealing from you, you can promptly terminate the employee for cause. This is the simplest situation to resolve.
A partnership is similar to the sole proprietor business structure, however there are multiple business partner owners involved. If no company has been incorporated and there is a relation that subsists between persons carrying on a business in common with a view to profit, there is likely a partnership in existence. If there is a partnership, the provisions of the Partnerships Act (Ontario) (the “Partnership Act”) would govern the relationship between the business partners. Often, partnerships will have a contractual agreement in place to govern each partner’s obligations concerning the business. Such a contractual agreement may also cover percentage terms, how to share revenues, expenses and tasks related to running the business. Of course, partners are not allowed to steal from the business.
A Corporation is run by its Directors and Officers who are also not allowed to steal from the business. A corporation is a legal entity that is owned by its shareholders and managed by its Directors and Officers. As it is its own legal entity, the shareholders, Directors and Officers are not typically legally responsible for the liabilities of a corporation.
Fiduciary Duty; the Duty not to steal
Partners, Directors, and Officers are all bound by a fiduciary duty which imposes a duty of loyalty on that person requiring them to act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationship. Different business structures owe a fiduciary duty to various parties, and as such the standard of care dictating the fiduciary duty will vary. Directors and Officers must act in the best interests of their corporation and Partners must act in the best interests of their other Business Partners.
In every transaction relating to the partnership, the partners are bound to do their best for the partnership itself and share any benefits with the other partners. Since Partners owe each other a fiduciary duty, they cannot obtain an individual advantage at the expense of the partnership. Among other things, this means they cannot:
- divert or usurp a business opportunity or a client from the partnership;
- misappropriate, take, or steal partnership property (money, intellectual property, confidential information or trade secrets); or
- use partnership property for their sole benefit.
Section 28 of the Partnership Act provides that: “Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner’s legal representatives.” Thus, each partner is entitled to receive all information relating to partnership dealings. Former partners can continue to owe fiduciary duties to each another but those duties are of a particular and limited kind.
Directors and Officers of Ontario and Canada owe a fiduciary duty to their Corporations which translates into a duty to act honestly, in good faith and with a view to the best interests of the corporation. Breaching this fiduciary duty can subject the director to personal liability. Among other things, this means they cannot:
- divert or usurp a business opportunity or a client from the corporation;
- fail to prevent and detect fraud;
- derive a secret benefit from a corporate transaction (ie take a bribe or kickback);
- misappropriate, take, steal, corporate property;
- sell corporate property at a discounted price; or
- use or disclose confidential corporate information against the interests of the corporation.
Directors and officers dealing with the corporation must disclose all material facts relating to a proposed dealing, as well as the existence of a potential conflict of interest. Also, it is important to note that a Director’s and Officer’s fiduciary duty is owed to the company itself and not to the shareholders of the company.
Taking swift action can help preserve the business. If your partner or a director of a corporation for which you are also a director or a shareholder violates their fiduciary duty, you have recourse against them. The best course of action is typically the following.
First, you must investigate and gather all relevant information. Collect and store all evidence in a safe place. Take screen shots of banking and other pertinent information. Using a private email, as a company email can be accessed by the unsavory business partner, send the information to yourself to have it timestamped. Second, retain counsel as soon as possible. Counsel will be able to review the facts of the matter and advise you appropriately on next steps.
If your business partner is not too difficult and can come to their senses, the resolution will likely be a negotiated one through your counsel. For a partnership, the partnership will likely be dissolved, and the assets of the partnership will be divided among the business partners. Of course, the business partner which stole would have their share of assets reduced. If your business partner will not agree to this reduction immediately, you may need to divide that asset equally and then commence an action against your business partner. If you have a Partnership Agreement in place, which is a contract between partners that lists the rights and responsibilities of the partners, the Agreement may govern how to resolve your dispute.
For a corporation, the business partner would need to resign from their position and return what they stole. A negotiated resolution is useful in preserving the business, limiting legal costs, and saving time. If you and your business partner are both directors and equal shareholders, your matter just became more complicated. More information on such a situation can be found here. If your business partner refuses to come to the table and negotiate, you will need to commence a court action against. Unfortunately, this will be costly and time consuming. Very few small businesses would survive such a law suit.
Possible Criminal Charges
While stealing from a company can lead to civil liability, it can also lead to criminal charges. Depending on the situation, you may wish to report your business partner to the police for criminal theft. While police are rightfully hesitant to get involved in civil matters, if there is clear evidence of theft, they will investigate. Whatever you do, it is extremely important that you DO NOT threaten your business partner with criminal investigation to get a benefit in negotiations as this could constitute blackmail; a criminal offense in itself.
To protect your business and yourself from civil or criminal liability, consult the statutes to better understand your liability, responsibilities, and duties as a business operator, and contact a lawyer if you are still unsure about where you stand.