Business partner misconduct is more common than many entrepreneurs realize—and it can destroy companies, careers, and reputations. When one partner betrays the trust of another, the fallout can lead to complex litigation, financial loss, and the unraveling of years of hard work. Below, we outline the most common ways business partners defraud each other, the warning signs, and what you can do to protect your interests. Each example below is likely an example of a breach of the partner’s fiduciary duty and fraud.
1. Misappropriation of Company Funds One common form of partnership fraud involves a partner stealing or misusing company funds
for personal gain. Examples include:
Using company credit cards for personal expenses.
Writing unauthorized checks or payments.
Transferring funds from the partnership account to secret accounts they control.
Depositing client or customer payments into a secret bank account.
Paying fake vendors or phantom employees.
This type of misconduct often falls under embezzlement, conversion, or breach of fiduciary duty—and may be grounds for immediate legal action. One way you can help prevent this is by maintaining an overview and understanding of the financial operations of the partnership and asking questions when you don’t understand something.
2. Hiding or Diverting Business Revenue
Fraudulent partners sometimes hide income or reroute business opportunities to avoid sharing
profits. This can include:
Pocketing cash transactions.
Diverting clients to a separate company they own.
Underreporting revenue or inflating expenses.
These schemes often come to light during an internal audit, partnership dispute, or forensic
accounting investigation. These type of actions are more difficult to detect unless you pay attention. Even then, an audit may be needed to uncover the misconduct—unless you ask the right questions.
3. Self-Dealing and Undisclosed Conflicts of Interest Partners owe one another a duty of loyalty and full disclosure. When one partner engages in self-
dealing, they put personal gain above the interests of the business. Common tactics include:
Awarding vendor contracts to businesses they control.
Leasing property or assets to the company at inflated rates.
Purchasing company assets for less than fair market value.
Such actions violate partnership agreements and often result in claims of fraud, breach of fiduciary duty, and unjust enrichment. Some of these items may not constitute fraud or a breach of fiduciary duty if the proper disclosures were made.
4. Manipulating Ownership Interests and Equity
Some partners attempt to change ownership stakes or dilute another’s interest through dishonest
means. These schemes may involve:
Backdating or forging amendments to the operating agreement.
Selling a stake in the company for below market value to a company they control.
Illegally issuing shares to themselves.
Forcing a buyout based on false financial statements.
Triggering an unnecessary capital contribution purely to dilute others.
Misrepresenting the value of the business during a sale or merger.
Each instance listed here is a clear case of fraud. These types of actions usually require a detailed review of the circumstances and details around each suspected nefarious conduct.
5. Excluding Partners from Key Business Decisions
Another red flag is when a partner intentionally excludes you from the day-to-day operations or
major decisions. This may involve:
Withholding financial records or passwords
Refusing to hold meetings or record minutes
Making unauthorized decisions or agreements on behalf of the company
Exclusion can serve as a tool for concealing fraud or for coercing a buyout under duress. Regardless of the type of entity—partnership, LLC, or corporation—most states require a business to produce records when requested by a stakeholder, such as a partner, LLC member, or shareholder. Even more detailed information may be available depending on the terms outlined in the operative agreement. When a partner withholds information from stakeholders, it is typically the first sign that your business may have experienced one of the other fraudulent
transactions.
6. Forgery and Falsification of Records In more egregious cases, a dishonest partner may go so far as to forge documents or falsify business records to hide their wrongdoing. This includes:
Altering financial statements
Forging contracts, checks, or signatures
Creating fake board minutes or shareholder resolutions
These acts often support broader schemes, such as partner theft, tax fraud, or fraudulent transfers.
What to Do If You Suspect Your Business Partner Is Committing Fraud If you suspect your business partner is defrauding you, time is of the essence. Contact an attorney and/or an accountant to help you work through the misconduct you think occurred. Delay can result in lost assets, destroyed evidence, and weakened claims.
