Issues That Can Lead to Fraud in a Small Business

Dunlap Law Insights

While many business partnerships do last and thrive, the reality is that a fair amount also fall apart. Sometimes, two partners just decide they cannot run the company well together. Other times, they have different visions of what the future should look like. Still other times, one partner commits fraud or theft, abusing their position within the company.

All of these situations can lead to litigation and the dissolution of a partnership contract. Let’s spend a little time looking at the last example: fraud. Why does it happen and what situations lead to it?

  1. Your business partner wants a better lifestyle.
    This is often a problem for start-ups. The life of a new business owner can feel glamorous, and they may feel tempted to do whatever it takes to uphold that image. This can lead to theft or embezzlement when they feel that their salary isn’t enough. In their eyes, the business’s money is also their money, so they’ll take it and use it however they want.
  2. Your business partner has too much power.
    You can sometimes prevent fraud by spreading power out within the company. If one person is solely in charge of the books and has access to all of your financial accounts, for instance, they can steal money from the accounts and then doctor the books to hide it. If one person has access to the accounts and another does the books, then each one has a check on their actions. This is a deterrent to fraud and theft because they do not feel like they can get away with it.
  3. Your partner is not actually qualified to run the company.
    If you were hiring someone from the outside, you would have a strict list of qualifications. When you started the business, though, you did it with a friend whom you got along with. As the company grows, it can become clear that they are not qualified for this role, and that can lead to serious financial errors, oversights, fraud, theft and a host of other issues.

How can you tell and what can you do?

How do you spot fraud? One thing to look for is an employee who refuses to take a vacation and acts very protective of their work. Do they worry that letting someone else do their job for a week will make it clear that they were cheating the system?

If you do find out that someone is doing this and you decide it’s time to take them to court or at least legally dissolve their role in the company, make sure you know exactly what steps you need to take.