Your Business Partner is Doing Some Shady Things… Now What?
Secret midnight meetings at the docks. Missing money. Numbers and accounts that don’t quite add up. And then your business partner pulls up to the office in a shiny new Bugatti. Whatever the red flags may be, you’re beginning to suspect your business partner is playing fast and loose with the law—and your business. It’s time to ask yourself some tough questions.
Am I liable if my business partner is using our business to engage in illegal activity?
Could you be considered personally, criminally liable? Yes, it’s possible—even if you’re not actively complicit. For instance, if you turn a blind eye to a crime, you could be held liable. If you have a supervisory position where you should be aware of a crime, you could be held liable. And of course, if you profit from a crime, you could be held liable. For example, imagine your partner makes a back alley deal that fattens company profits. The increase in company profits would benefit you, so you would be profiting from the crime.
What happens if I’m found liable?
Depending on the crime, you could go to jail. Perhaps more likely, you could end up paying out a lot of money, including civil penalties. Investors or shareholders will probably sue. Any protection you have limiting your personal liability is typically void if you’re found guilty of criminal behavior.
What happens if my partner or business is convicted of a crime?
If your partner’s convicted of a crime, you’ll have lots of problems to fix. Note that even if your partner is behind bars, they’re still your partner. You’ll have to figure out how you want to proceed—for instance, you may be able to take procedural steps to remove their powers (or remove them from the business entirely). And if you lose your partner, you’ll also have to replace whatever they brought to the business—money, services, skills, connections, etc. Your business reputation will likely take a hit, especially if the crime becomes a major news story. And while it’s not fair, your personal reputation may also suffer, thanks to guilt by association.
Criminal charges aren’t just limited to the people in your business either. If you have a business entity such as an LLC or corporation, it’s possible that the business itself could be charged with a crime. A corporation or LLC is considered a “legal person.” And just like a flesh and blood human being, these kinds of businesses can be criminally charged. Of course, businesses can’t go to jail, but they can receive other serious penalties, including fines and sanctions. States can even revoke your business’s corporate charter or business license.
If I suspect my partner is using our business for criminal activity, what should I do?
The first step is to get a lawyer. A lawyer experienced in corporate law can review your specific situation and help you figure out how to best protect yourself and your business. You can also seek help from your state or local small business center. You may want to talk to an accountant as well to help you review finances.
Some people are tempted to start trying to play detective. But this isn’t Cabot Cove, and you’re not Jessica Fletcher. If you have a smoking gun, you can work with your lawyer to contact the appropriate authorities (and file a lawsuit against your partner). However, trying to dig up evidence or “solve the case” yourself can be dangerous—and getting closer to your business partner is really the last thing you should be doing. If your partner is acting shady, you’ll want to put as much distance between the two of you as possible.
How can I get rid of my crooked business partner?
If all you have is your suspicions—no smoking gun and no charges filed—it can be tough to rid yourself of a partner. But that doesn’t mean you’re stuck. There are a few different ways to separate from an unwelcome business partner.
The first step is to review your agreement (preferably with your attorney). Depending on what kind of business you have, you might have a partnership agreement, an operating agreement, or bylaws. If there are any buyout or exit clauses in your agreement, you’ll have to abide by them. Don’t have an agreement? Turn to your state’s statutes. For instance, if you have a corporation, you can find corporate statutes that explain the processes for adding and removing people from your business. (And going forward, always, always have an agreement! Check out our free templates for operating agreements and bylaws.)
Armed with the information in your agreement and statutes, you can take a few different paths to separating from your business partner:
- Buy them out: This can be pretty expensive, especially if your partner isn’t interested in leaving. While agreements vary widely, it’s typically hard to make someone go if they don’t want to. Some agreements have exit clauses such as “shotgun clauses” where one partner names a price per share and the other partner then gets to decide to buy or sell their shares—just note that if you trigger one of these clauses, you might end up having to sell when you were hoping to buy.
- Force them out / Reduce their power: Depending on the terms of your agreement and how the power is distributed in your business, you may be able to band together with other members, partners, or shareholders to pass a majority vote to remove the suspicious partner or reduce their role. Alternatively, if you feel you can negotiate with your partner, you may be able to convince them to take a more passive role in the business.
- Dissolve the business: Giving up your business is a big step, but it may be your best option, particularly if your business is already struggling.
- Leave: If all else fails, sometimes it’s best to just cut your losses and get out of Dodge.
Once you successfully separate yourself from your partner, know that this doesn’t mean you’re in the clear. You’ll want to document everything, and safely store all your business records in case anything is called into question later on. You may need to file paperwork with the state and notify the IRS of the changes to your business. And it’s a good idea to make sure that clients and vendors know what’s going on as well. For instance, if you leave the business, you don’t want your partner to use your good name to secure contracts.
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