Disputes Between Co-owners (Shareholders, Members or Partners) of a Business

Being a co-owner of a business can lead to disagreements, conflict, and disputes with, and accusations from, the other co-owner(s). These accusations can include accusations of fraud. Fraud may indeed be committed by a co-owner of a business.

Fraud by a co-owner can be committed in various ways to include schemes that fall under occupational fraud. Perhaps the owner is in charge of depositing money received from customers and is depositing part of the receipts into their personal account – maybe it is every 4^th receipt (or some other predetermined interval), maybe it is only cash receipts, maybe it is receipts below a certain dollar threshold (which the co-owner is hoping will stay under the radar and not flag), etc. Perhaps cash is being withdrawn at the time of deposit. Perhaps the co-owner is presenting personal expenses to the business as reimbursable business expenses. Perhaps cash is being withdrawn from business accounts. Perhaps the business is paying for personal expenses of the co-owner through a company credit card. Perhaps the co-owner has started a competing business and is paying for the expenses of the competing business through the original business while some revenues of the original business are being deposited into the accounts of the competing business. Perhaps payments are not made for the benefit of a competing business but just for the benefit of another business that the co-owner owns. Perhaps the co-owner owns the premises from which the business operates and is charging an exorbitant amount of rent to the business that the other co-owner(s) are not aware of. Perhaps the co-owner is taking money out of the business by charging high consulting or management fees (that the other co-owners are not aware of) to the business. Perhaps the co-owner uses a small part of their house for inventory storage for the business, but the co-owner’s entire mortgage is paid for by the business. Perhaps the co-owner is not taking cash but other assets such as inventory. Perhaps the rental income from one or more properties owned by the business and collected by the co-owner is just never deposited into business accounts while the co-owner misrepresents to the other business owners that the properties were unrented and stood vacant.  To steal even more money, the co-owner additionally generates fictitious expenses for the supposedly vacant property such as security costs, advertising for tenants, etc. Etc. A business may be profitable but the profit is being siphoned off and there may never be enough money in the bank when the business needs it.

Absentee owners are usually at an even greater disadvantage when a more involved owner commits fraud because they may have limited or no visibility on the operations and monetary inflows and outflows of the business.  They may have limited or no access to the business, records and/or bank accounts or access may be restricted in various ways. A co-owner may even lock another owner out of the business, physically or virtually or both. A co-owner may run the business operations, control the money and keep the other less involved or absentee owner(s) in the dark, taking advantage of their trust. Whenever that co-owner is asked for a financial statement, supporting document or other record or an explanation as to transactions and events, it does not get provided or only part of it gets provided. Perhaps deliberately illegible copies or doctored copies are provided. There may be poor communication, delays and ongoing excuses. Sometimes a spreadsheet will be provided instead of a financial statement generated from the accounting system. Spreadsheets are usually subject to greater manipulation. Sometimes aggregated (instead of disaggregated) data is provided which means that the details underlying those numbers cannot be seen and examined from the aggregated data. Eventually the other owner(s) may grow suspicious that something is amiss and call for a forensic accounting fraud examination to be done.

Sometimes, profit-share calculations are involved which are not straightforward or are made complex by the fraud(s) committed by the fraudster co-owner. The source of the calculations provided may be the fraudster co-owner themselves who provides little or no supporting documentation to the other owner(s). A forensic accountant may be asked to determine the profit-share due to the other owner(s) after accounting for the impact of the fraud by the fraudster co-owner.

The other owner(s) may have lost all trust in the co-owner they are having issues with. A forensic accountant may be retained to determine the source (inflows) and use (outflows) of funds of the business including uses such as payments made to, or for the benefit of, the fraudster co-owner or as directed by the fraudster co-owner, including to unknown financial institution accounts. As part of a business dissolution, a forensic accountant may calculate the amount of an equalizing payment to be made between two business owners from an analysis of assets, liabilities and different types of relevant transactions. Offsetting payments may be a factor such as transfers into the business by the fraudster co-owner when money was needed by the business due to the fraud in order to keep the fraud undetected. Recovery may be sought from the fraudster co-owner for fraud losses, penalties, late fees, overdraft fees, forensic accounting fees, legal fees and other items as a proximate cause of their fraud actions.

There may have been an investment made in real estate, which may or may not have been rented out.  Multiple people may have been involved in paying for the downpayment, the mortgage, improvements, property taxes, homeowners association fees and various other expenses associated with real estate. There may have been a single property or a multi-unit property or multiple properties in different locations. In addition, one or more of the owners or their family members may have lived in part or all of the premises. Perhaps the business venture paid for the utilities of the owner-occupant. Sometimes, the co-investors are family members. There may be questions of quantification for partition purposes which may be complicated by issues of payment/lack of payment for owner occupancy.

Disputes between business owners may be resolved in various ways including by mediation, arbitration and litigation.