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Can you sue a business partner for fraud?

Entering into a business with a partner may result in unexpected outcomes. Being in business together means that your partner’s actions have consequences. These consequences can be both professional; and personal. In some cases, partners may need to resort to legal action for wrongful actions committed by the other party. The complexity of these lawsuits is heightened due to the unique nature of partnerships.

It is important to be careful when entering into a partnership. Conducting extensive due diligence before agreeing to work with someone is always advised. If a partner engages in unethical or illegal activities, legal action may be necessary to avoid negative consequences.

The best defense for your business: Partnership Agreements

As you start a business partnership, you gradually get to know your partner better. It’s crucial to take advantage of this initial phase of cooperation and ensure that all parties have a clear understanding of their respective rights, responsibilities, and duties. The best way to achieve this is by putting everything in writing. This foundation will serve as a guide to help build a successful business. Neglecting to lay this foundation with a business partnership agreement is one of the most significant risks that any business can face.

Investing early into a codified business partnership agreement will almost certainly be less expensive than facing litigation down the road. Time is money, right? Instead of investing your time and attention into a dispute that arose thanks to a lack of agreements in place, it’s recommended to dedicate that time towards your business. Litigation can be a time-consuming and draining process. 

What happens if your business partner commits fraud?

Partnership fraud refers to the act of a partner purposefully using deceitful means to secure personal or financial benefits at the expense of the partnership and thus the business. For instance, if a partner were to use funds that were meant for the business, for their own personal gain, it would constitute a type of partnership fraud. Another form of partnership fraud would be using the partnership’s assets to start a competing business. 

Having a written partnership agreement in place which delineates the duties of the partners involved is crucial. If that agreement shows that the partners have a fiduciary duty to the business, which can include a duty to disclose, then the partner acting fraudulently can be held accountable.

Of course, even with an agreement in place, suing a partner might be risky. Depending on the business, the agreement in place, and any allegations against the partner, there might be alternative routes to explore other than outright litigation. 

When is litigation the best option?

Consider exploring alternatives to resolving disputes outside of court before deciding to pursue legal action. Opting for non-litigious methods of resolution is generally a more preferable choice to avoid the expenses associated with a lawsuit.

Although it may be possible to take legal action against your partner, it may not be the wisest decision. Lawsuits can be costly, complicated, and could potentially result in the termination of the partnership. Furthermore, there is a possibility that you could incur significant time and expenses in pursuing legal action, only to lose the case. Therefore, it’s advisable to explore alternative options to litigation whenever feasible.
However, if alternative routes are not an option, your case is best left to an experienced litigation attorney.