What To Do If You Suspect Your Business Partner Is Stealing – Some Basics

In any case involving theft by a business partner or business dispute, it is very important to have an understanding of the basic issues and legal framework. Although these cases often involve complex problems, you cannot determine a good course of action without starting with the basics.

 

Here are 5 of the basic issues and what to do if you anticipate a business dispute with a partner or small business in Connecticut.

1. Figure out the type of entity you formed for your business

Principals of small or closely held companies or partnerships typically start off their businesses by choosing an entity such as a Limited Liability Company (LLC), Limited Liability Partnership (LLP), or Corporation (C Corp. or S Corp.). This may seem like a "no brainer" but you might be surprised that many partial business owners (typically minority owners) do not know the exact type of business entity they own.  

To determine what type of entity you formed look for documents such as Articles of Organization, Articles of Amendment, Certificate of Incorporation, Organization and First Report, Certificate of Amendment, Certificate of Limited Liability Partnership, or Statement of Partnership Authority. These are the so called "incorporating" documents or "originating" documents filed with the Secretary of State. These documents clarify the type of entity chosen and the original incorporators or members of the entity. These documents are available to the public and are available for searching at the Secretary of State website www.concord-sots.ct.gov . If you cannot find your documents, try searching the Connecticut Commercial Recording Division website.

2. Figure out the structure and control of your entity.

The structure and operations of an entity often are governed by formal documents in most cases, or by default rules in others. Formal documents may include bylaws, resolutions, shareholder agreements, stockholder agreements, voting agreements, or operating agreements. These documents likely detail your ownership and management rights.

Of course, we see many cases where these agreements do not exist or were never finalized. It remains important to find what you have to show any agreement, even if informal. Maybe you exchanged some emails or you drafted a memorandum of understanding or informal partnership agreement. However, if you do not have a formal or informal agreement, Connecticut General Statutes can operate as a fall back or default to govern the operation and management of corporate entities. You can review the basic statutory laws of Corporations on the Connecticut General Assembly Website www.cga.ct.gov/current/pub/titles.htm . For example, Connecticut statutory laws for Corporations are found in Title 33.

3. Get access to the books and records of the business.

Many times, clients come to us after the business partnership has fallen apart, become insolvent, or dissolved. In many of these instances, one of the partners has access to all the records, and the other partner does not. Your rights to obtain company records may be spelled out in the agreements or documents mentioned in # 2 above. Alternatively, inspection rights for books and records are provided by statutory law. For example, Connecticut General Statutes § 33-946 – 950 permits inspections of books and records by shareholders and directors. However, many times feuding business owners end up having to file a so called "books and records" lawsuit in Connecticut state court to get access to the corporate books and records.

Getting access to the company financials is important. At minimum, you should seek to obtain summary financials, such as income statements, profit and loss statements, or trial balances. However, the ideal is to have access to the actual raw data. This means getting access to bank account(s) (including web access), loan accounts, credit accounts, and the company accounting journals. Getting access to this data may depend on whether the accounting software is server based, such as Peachtree, or cloud based such as QuickBooks online.

4. Identify all sources where records might be stored

>Businesses generate all kinds of data and records. Increasingly, this data is completely digital and electronically stored on a computer, server, or at third party sites such as Rackspace or Boxnet. Additionally, emails seemingly become critical in every case that ends up in litigation. You need to identify where emails and other electronic means of communication (text or instant message) might exist such as the company email servers or third party sites (i.e. Google, Microsoft, Comcast, or Verizon).

Once you identify the locations of the records, you may need to try to preserve this information so you have it in usable form in the event of a dispute. Correctly copying digital records may require an expert in computer forensics. You also may want to involve an attorney so that you understand the full extent of your obligations to preserve evidence and gain protections from discovery.

If your dispute requires a lawsuit to resolve, you many need to act quickly to subpoena records from third party providers before records become lost, destroyed or deleted. If you suspect key evidence exists in emails, you may need to subpoena Internet service providers or third parties that provide applications over the Internet such as Google. Generally, to get the authority to issue a subpoena, an attorney will need to bring a lawsuit concerning the dispute or a lawsuit seeking permission to seek "discovery" of these documents to help build a case.  This is known as a bill of discovery. 

5. Seek help from professionals.

Various professionals, such as forensic accountants, computer forensic experts, fraud investigators, and attorneys can assist in most business disputes. It is a good idea to consider a conference with a professional to review your concerns. Also, you should always consider having your attorney lead the investigation as the involvement of an attorney can add a layer of protection when your opponent later seeks to obtain the results of your investigation.