When your business partner commits an illegal act, it is not always something that directly harms you, like embezzlement. In fact, some illegal acts could actually benefit you. For example, if you are a 50% owner of a closely-held business in New Jersey, but your business partner is the one in charge of financial matters, you may benefit personally and directly from tax fraud. If expenses that are known not to qualify as legitimate business expenses are still deducted on the corporate tax return, and the company is an S-Corp, your personal taxes are lowered. Even if you are a C-Corp, you still benefit.
Business Partner Breaking the Law
You are still being harmed, though. If the company is audited, penalties and interest may be due. You could be alleged to have had knowledge of the illegal deductions. And tax violations need not be limited to improper expenses. Often payroll taxes are not paid appropriately, or withholdings are not correct. All these things put the company at risk.
Of course, there are even worse illegalities than tax fraud. Violating the New Jersey Law Against Discrimination by creating a hostile work environment, including an atmosphere of sexual harassment, also places the company at substantial risk – especially a closely-held business that does not have employment practices liability insurance (EPLI). In fact, a judgment for harassing conduct could be substantial enough to put a company in a dire financial position.
Shareholder Oppression Claims
Ideally, you could rein in your partner and ensure that such conduct ceases, so the company is not continually put at risk. You may not need an attorney to do that, but you do need an attorney to advise you when your partner refuses to modify his behavior.
If the behavior does not change, and the risk that you are being asked to share becomes simply unacceptable, be aware that your business partner breaking the law can be grounds to assert a shareholder oppression claim in New Jersey. First, though, it will be critical to assess whether you were involved in the conduct you will allege was illegal, or even whether your partner can lie and say you were. Making an aggressive assertion based on illegality requires guidance from an experienced business divorce attorney. But it is important to realize that if your partner’s conduct is putting the company in a precarious position, you are not condemned simply to sit back and take it, or to have your protests ignored. Remedies a court may be willing to provide include, in some cases, the appointment of someone to ensure the illegal activity stops, as well as a court-ordered buyout.