8 Warning Signs Your Business Partner Is Stealing From the Company

Business partnerships are built on trust, but that trust can sometimes be misplaced. At TONG LAW, we’ve represented numerous California business owners who discovered their partners were engaging in theft, embezzlement, or other forms of financial misconduct. These situations not only threaten your company’s financial health but can destroy relationships and reputations that took years to build.

If you suspect your business partner might be stealing from your company, understanding the warning signs is crucial for protecting your interests and taking appropriate legal action.

Financial Discrepancies You Shouldn’t Ignore

1. Unexplained Cash Flow Problems

Your business appears profitable on paper, yet there’s never enough cash to cover expenses or invest in growth. When revenue is strong, but liquidity is consistently tight without a clear explanation, it could signal funds are being diverted elsewhere.

What to watch for: Recurring cash shortages despite stable or increasing revenue, delayed vendor payments, or inability to meet payroll despite sufficient sales.

Legal consideration: Under California Corporations Code Section 1500, businesses must maintain “adequate and correct books and records of account.” Proper financial record-keeping is not just good practice—it’s the law.

2. Missing Financial Documentation

When financial records consistently go missing, especially those related to expenditures, cash transactions, or payments to specific vendors, this could indicate deliberate concealment.

What to watch for: Gaps in sequential invoice numbers, missing receipts for large purchases, or unexplained delays in providing requested financial information.

Legal considerations: Business owners have legal rights to inspect company records under California law. If your partner blocks your access to financial documents, this may violate your rights under the  Corporations Code Sections related to record inspection.

3. Unusual Banking Activity

Unexplained withdrawals, transfers to unknown accounts, or new accounts opened without your knowledge can all point to financial impropriety.

What to watch for: Cash withdrawals without corresponding business expenses, transfers to personal accounts, or unfamiliar account statements.

Legal considerations: Unauthorized transfer of company funds for personal use may constitute embezzlement under California law, potentially triggering both civil and criminal penalties.

Operational Red Flags

4. Lifestyle Changes Inconsistent With Income

If your partner suddenly displays wealth that seems disproportionate to their known income—purchasing luxury items, taking expensive vacations, or making significant investments—it warrants closer examination.

What to watch for: New luxury vehicles, expensive real estate purchases, or lavish spending that doesn’t align with their declared income.

Legal considerations: While lifestyle changes alone aren’t proof of wrongdoing, they can be relevant evidence in legal proceedings related to embezzlement or breach of fiduciary duty claims.

5. Exclusive Control Over Financial Functions

When one partner insists on handling all financial matters—refusing to delegate or share financial responsibilities—it creates an environment where theft can go undetected.

What to watch for: Resistance to implementing financial controls, objections to bringing in outside accountants, or refusal to share financial passwords and access.

Legal considerations: Partners have fiduciary duties to each other under California law, including duties of loyalty and care. Intentionally concealing financial information may constitute a breach of these duties.

6. Vendor or Customer Anomalies

The creation of fictitious vendors or the diversion of customer payments are common methods of business theft.

What to watch for:

• Vendors with vague services or unusually high prices
• Vendors with addresses matching or near your partner’s address
• Customers reporting payments that don’t appear in your books
• Unusual payment arrangements proposed for certain clients

Legal considerations: Creating fictitious business transactions may violate California Business and Professions Code Section 17500, prohibiting false or misleading business statements and practices.

Changes in Behavior and Business Practices

7. Increasing Secrecy or Defensiveness

A partner who becomes unusually secretive, defensive, or hostile when questioned about financial matters may be hiding improper activities.

What to watch for: Overreactions to routine financial questions, restricting access to areas or documents previously available, or deflecting conversations about financial matters.

Legal consideration: While behavioral changes alone don’t constitute legal evidence, they can be important in context in partnership dispute litigation and may support claims related to concealment or fraud.

8. Delaying or Preventing Financial Audits

Regular financial audits are standard business practice. A partner who consistently finds reasons to postpone, cancel, or limit the scope of financial audits may be attempting to prevent the discovery of financial misconduct.

What to watch for: Repeated rescheduling of planned audits, arbitrary limitations on what auditors can examine, or insistence on using only certain “trusted” financial professionals.

Legal considerations: Depending on your business structure and partnership agreement, preventing agreed-upon financial oversight may constitute a breach of contract or violation of operating agreements.

Taking Action: Next Steps if You Suspect Theft

If you recognize these warning signs in your business partnership, consider taking these protective steps:

1. Document everything. Keep detailed records of suspicious transactions, conversations, and behavior.
2. Secure your access. Ensure you maintain access to critical financial information and accounts.
3. Consider a forensic audit. A specialized financial investigation can uncover sophisticated theft schemes.
4. Consult with legal counsel. Before confronting your partner or taking action, speak with an experienced business attorney who can help protect your interests and advise on the appropriate legal strategy.
5. Review your partnership agreement. Understanding the specific terms of your agreement will clarify your rights and potential remedies.

At TONG LAW, we understand the legal challenges involved when business partnerships break down due to theft or misconduct. Our experienced business litigation attorneys can provide guidance on investigating suspected theft, securing business assets, and pursuing appropriate legal remedies.

Contact TONG LAW for Partnership Dispute Assistance

If you suspect your business partner is stealing or engaging in financial misconduct, don’t wait until the situation worsens. Our attorneys can help you understand your legal options while working to protect your business interests and personal financial security.

Contact us today for a confidential consultation on your partnership dispute concerns. With offices in Oakland and Sacramento, we serve business clients throughout California.