Choosing to cooperatively run a business with a partner is a major commitment that comes with financial and legal exposure. As such, people who do business together often negotiate very thorough contracts detailing what they expect from one another.
They may also establish a detailed business plan exploring the idea for the company and their long-term plans for the organization. Partners are bound through their contractual obligations to one another. Those who operate and own businesses typically also have a fiduciary duty to the organization because of their position of trust within the company. Business partners should both act in the best interests of the organization.
One partner’s breach of their fiduciary duty can have negative implications for the other partner and the organization. People operating businesses with others may need to be on the lookout for warning signs that a partner may not have the company’s best interest at heart.
How can partners breach their fiduciary duty to their business?
Through self-dealing
Companies frequently have to do business with other organizations or professionals. They require services, raw materials or products provided by outside parties to operate. Self-dealing occurs when one partner intentionally negotiates arrangements that benefit them via a secondary business in which they have an interest.
They might have a direct ownership stake in another small company, or they might hire the business that employs their spouse to provide recurring services for the organization. They may even pay above-market rates for goods or services to profit at the expense of the company. Self-dealing can damage a company’s finances and is a major breach of trust between partners.
Through embezzlement
Some people don’t indirectly damage the business for personal gain. They decide to directly harm the company by intercepting payments, altering financial records or misappropriating company property for personal use. They might use the business’s expense account for personal shopping or overcharge certain clients and keep the difference between what the client paid and what the company charges.
Embezzlement can damage a company’s profitability and is often criminal. One partner who discovers the other’s breach of fiduciary duty may need to take legal action to stop their behavior and recover losses if appropriate.
Reviewing documentation of misconduct and the original partnership agreement with a skilled legal team can help people plan an appropriate response when they discover signs that a partner has breached their fiduciary duty. In some cases, business litigation might be necessary to hold a partner accountable for their wrongdoing.
