What Should I Do About a Business Partner Who Has Gone Rogue?

February 6, 2014

It’s a little like asking, “What should I do about getting smallpox?” The immediate answer is, “How the heck did you get smallpox?” Prevention, ladies and gentlemen, prevention! When your nearest and dearest have stopped yelling and your mother has stopped sobbing audibly in the back bedroom, someone may ask you what you mean. Deep breath.

What Do You Mean by “Business Partner”?

Many people use this term loosely, but in terms of legal liability and the remedies you may have, it matters whether you were actually partners or whether you had organized your business in some other way.  Had you registered your partnership with the state?  Did you draw up a partnership agreement?  The latter, though not legally required, may contain specific provisions relating to decision making, liability and dissolution.  The general rule with partnerships, however, is that each partner is fully liable for not only for his or her own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.

And How Did This Person “Go Rogue”?

There’s a big difference between unilateral decision making with which you don’t agree (signing a lease without consulting you) and stealing from a client.   Consider the former situation a wake-up call.  It’s time to review the terms of a partnership agreement or finally sit down with an attorney and an accountant to work out the terms of one.  The latter case is bad.  You will need to dissolve the partnership to prevent further harm and work with your lawyer to try to settle with the victim.

What Shall We Do Now?

You may not be able to avoid liability to a third party who has been injured by your partner, but you may be able to lessen your overall harm by suing your partner for fraud or breach of fiduciary duty.  And, by all means, get out of that partnership.

  • A legal action for fraud would require showing that your partner lied to you, you acted reasonably in relying on the lie and that you were harmed as a result of this reliance.
  • You may be able to sue for breach of fiduciary duty if your partner took money from a business account and used it for personal purposes. 
  • The same facts might also support a criminal complaint for embezzlement.  Remember that a criminal action, although it may feel very satisfying, will not put money in your pocket.
  • Finally, if the situation is this serious, you should end the partnership.  The dissolution process is different in every state, but it generally involves filing paperwork with the Secretary of State.

You will probably want to do all of these things simultaneously and as soon as possible.

So, You’re Ready to Try Again.

The time you spend evaluating who you want to be in business with is never wasted.  This time around, you may also want to devote some careful thought to your basic business structure.  Partnerships, like sole proprietorships, are easy to set up, but the liability issues can be troublesome.  An LLC may work better for you, specifically for that reason.  Your investors may eventually have something to say about business form as well.  Perhaps the most important tool for preserving business relationships is a formal written agreement that defines roles, responsibilities and an exit strategy.

Partnership Law Page
Nasir Pasha

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Nasir N. Pasha is the managing attorney of Pasha Law, providing essential legal services and support to businesses and corporations in California, Illinois, New York, and Texas. He oversees all of the firm’s operations and is a pivotal force in maintaining client relationships and ensuring that each transaction is brought to its best possible conclusion.

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Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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