What are some of the most effective strategies for dealing with business theft or commingling in a California company? How could the behavior of a business partner, fellow member in an LLC or another shareholder in a corporation affect your company?
Key Takeaways About Dealing with Business Theft or Commingling in a California Company:
- California courts apply the doctrine of “piercing the corporate veil” when a business is treated as the alter ego of its owner rather than as a separate legal entity. This can occur when corporate formalities, internal policies, and established processes are ignored, or when the assets and liabilities of the company are not clearly separated from those of the individual.
- The protections of the corporate veil and the limitation of personal liability for corporate debts or liabilities are not automatic simply because you formed an LLC or corporation. It is protected and preserved through disciplined financial conduct and clear documentation.
- It is never in your best interests to confront a business partner or co-owner you suspect of stealing and/or commingling of funds or assets.
- Watkins Firm attorneys will help to develop and implement monitoring and/or controls and specific processes to clarify and document what is happening, and to reduce the likelihood of theft or unscrupulous business practices.
Why Commingling Is So Serious in California
California courts apply the doctrine of “piercing the corporate veil” when a business is treated as the alter ego of its owner rather than as a separate legal entity. This can occur when corporate formalities, internal policies, and established processes are ignored, or when the assets and liabilities of the company are not clearly separated from those of the individual.
If a court determines that alter-ego behavior exists, creditors may be permitted to pursue personal bank accounts, real estate holdings, and personal investment assets to satisfy business debts. The protection of limited liability depends upon consistent and disciplined separation between the individual and the company.
Regulatory and Tax Consequences
Beyond civil liability, commingling or theft can trigger:
- IRS and California Franchise Tax Board audits
- Employment Development Department investigations
- Criminal referrals in extreme cases
- Loss of credibility in litigation
Courts and regulators do not look only at intent. They look at patterns.
The Practical Safeguards
To prevent business theft and commingling in a California company:
- Maintain separate bank accounts at all times
- Implement internal financial controls
- Document all capital contributions and distributions
- Use written operating agreements or bylaws
- Conduct periodic internal financial reviews
The protections of the corporate veil and the limitation of personal liability for corporate debts or liabilities are not automatic simply because you formed an LLC or corporation. It is protected and preserved through disciplined financial conduct and clear documentation.
Don’t Try to Take Action Yourself when Dealing with Business Theft or Commingling in a California Company
It is never in your best interests to confront a business partner when dealing with suspected business theft or commingling in a California company. If you are right, you may inadvertently provide an opportunity for them to cover their tracks and damage your own financial position. If you are incorrect, the resulting damage to the business relationship may not be recoverable.
Young or inexperienced business owners often find themselves in situations where they “run and gun” in order to keep up with the ups and downs of managing a business. They may not understand the laws of California and the necessity of sound business practices and controls. They may not understand the complications of commingling, and the damage this does to the corporate veil that protects you and your family.
If you suspect a fellow business owner or partner of theft you should contact the experienced San Diego business attorneys at the Watkins Firm as soon as possible for a free consultation at 858-535-1511. We have more than 40 years of experience in these cases and will provide substantive insight into the initial steps you should consider for managing theft or commingling in a San Diego business.
The Next Step is to Usually to Implement Monitoring and Controls
Our attorneys will help to develop and implement monitoring and/or controls and specific processes to clarify and document what is happening, and to reduce the likelihood of theft or unscrupulous business practices. We have practical suggestions regarding the handling of cash, as well as transactions within the business accounts of your company. We can help you to establish internal controls and processes that document the theft or other inappropriate activity such as commingling of assets, while protecting your own interests in the situation. We provide guidance to our clients that is designed to protect the day-to-day operations of the business, and to provide documentation of inappropriate business practices such as misuse of funds or commingling.
What are your goals for the situation at hand? If you intend to genuinely put a stop to this behavior and/or remove the party from an ownership position it will require substantial evidence and legal guidance.
Pro-Tip: “For example, we’ve, we’ve had so many shareholder fights where a group of friends, or a group of friends who know friends, maybe 30 people invest in a company and it’ll be doing well, but not great. And the investors, the shareholders won’t be receiving disclosures, or they will be receiving them, but they sort of don’t add up. And then they do an investigation and they come to our law firm and they say, ‘well, let’s, let’s get in there to see the books and records,’ and you get some pushback from the company. And that’s when all the hairs in your neck stand up and we file a motion.
And we discover through our due diligence that the company’s doing very good and that they also formed an offshore corporation of the same name. And they’ve taken all the assets and they’re all driving Rolls-Royces. So this has happened more times than I can say, because it just does happen. Nobody fights over anything unless there’s money involved. If it’s just doing okay, they would tell the truth and say, it’s all great. But if that big money offer comes in the door and they have a way of keeping it for themselves, it’s very tempting for human nature to turn that down.
Owners and majority interests usually won’t do these things unless it’s really worth something. Think about timing . If let’s say you don’t have a shareholder agreement, or you have a weak shareholder agreement and, management has broad discretion to do a lot of things, and they’re getting ready to do some questionable things, to make a big profit. And you come along and say, ‘wait a minute, I think something’s wrong here.’ And you pose an objection. Well, before you file a lawsuit, this opportunity that management has is still there. So if you are the squeaky wheel right away, before they go forward with whatever they’re doing, then you may profit from that. But if you’re not, then it’ll just happen. And instead of sharing in the profits, you’ll be fighting to claim you had rights to get some money back.
We’re describing what I would consider to be a conflict of interest between an owner’s obligation to their fellow owners, members, or shareholders and their own personal interests. Everybody hears the terms commingling or business theft and they think it’s something like special or amazing or complicated, but it’s really not. This is the world’s oldest con game.” – Dan Watkins, Founding Partner
40+ Years Experience Resolving and Dealing with Theft or Commingling in a California Company
Concerns about dealing with theft or commingling in a California company affects more than just money, it can distract you from the most important focus of running your company. Whether you want to catch a partner and remove them from the situation, or “influence” them to a higher level of accountability and restitution, the attorneys at the Watkins Firm will work to protect your interests and accomplish your goals.
The Watkins Firm has served the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California for more than 40 years. Ask how we have helped to manage similar situations and how we work to resolve business disputes in a timely and cost effective manner. We invite you to review our Podcast Episode 11 – Resolving Business Disputes, as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
