Business partners have to put a lot of faith in one another. They need to trust each other to follow through on their promises and to act in the best interests of the company. Business partners have a fiduciary duty to the company. That means they should put the company’s best interests ahead of their own wishes.
Not everyone interested in running a company has the integrity to fulfill their fiduciary duty to the organization. There are many ways for business partners to breach the fiduciary duty that they owe to the business they started. Self-dealing is a common way for one partner to put personal enrichment ahead of what is best for the business.
What does self-dealing involve?
Self-dealing scenarios are often relatively straightforward. A business partner may run a secondary business or professional practice. They may then hire that outside organization to provide services or materials for the company.
Typically, they do so at an above-market rate or do not provide the same quality that others might. They know they aren’t at risk of returns or complaints because they own the client organization. That self-dealing can lead to a company not receiving the goods and services it needs to operate efficiently. It can also lead to financial setbacks. What benefits the partner engaged in self-dealing may be detrimental to the organization overall.
In some cases, there may be a degree of separation in a self-dealing scenario. The partner acquiring goods or services from an outside provider might hire a business that their best friend works for or their spouse owns. They may benefit indirectly through enhanced marital income or a kickback provided by a friend or family member who receives more business due to their questionable practices.
Self-dealing may lead to litigation
In some cases, self-dealing and the losses it creates for a business may prompt one partner to initiate a lawsuit against the other. They may want to recoup the money that the company effectively lost due to the self-dealing arrangements.
Other times, the goal may be to force a buyout. The partner engaged in self-dealing may need to exit the organization because they have breached the duty they had to the organization and destroyed the trust in their relationship with their business partner.
To prevail in civil court proceedings related to financial misconduct, business owners typically need clear evidence of wrongdoing. They also need to determine the best solution given the circumstances. Many times, frustrated partners affected by someone else’s breach of fiduciary duty do not want to dissolve the organization they started. Instead, they want to take sole control of the business or hold their partner accountable for their financial misconduct.
Initiating business litigation can help resolve conflicts related to a partner’s breach of their fiduciary duty. Those who uncover concerning signs of financial misconduct may need help gathering evidence and preparing to take their matter to court. Seeking personalized legal guidance is, therefore, generally wise under such circumstances.