Key Takeaways

  • A business owner can potentially be charged with embezzlement if the business is not solely owned.
  • Embezzlement typically involves misappropriating funds that one has been entrusted with, even as a co-owner.
  • Sole proprietors generally cannot embezzle from their own business, but legal liability may still arise in other forms (e.g., creditor fraud).
  • Legal consequences can include fines, restitution, and prison time, depending on the severity and structure of the business.
  • Preventative controls and legal documentation are critical to avoiding fraud and establishing liability boundaries among business stakeholders.

The question “Can you embezzle from your own business?” is a common one. The sad reality is that most cases of fraud take place in small businesses. In fact, according to the Association of Certified Fraud Examiners, the losses that the smallest businesses have to absorb are exponentially greater than those suffered by larger companies.

Fraud, by way of a broad definition, is personal gain made by deception at a company's expense. Embezzlement, similarly, is a person dishonestly taking goods (usually money) that have been entrusted to them.

There is a common denominator in the reasons why small businesses more often fall victim to fraud and embezzlement, and that is the trust that the business owner has in his or her employees.

In smaller business environments, including online businesses, employees are often entrusted with great authority. Without the financial resources to hire a great number of people, this authority ends up in the hands of a small number of people. This leads to a scenario in which duties are not segregated, which can lead to problems with internal control.

Given that this scenario is particularly common in small businesses, owners of these businesses leave themselves particularly open to fraud and embezzlement. The misplaced trust that they sometimes have in their employees has, in some cases, been earned over the course of many years. It is important to note that this does not only take place in small businesses. Trusted employees of businesses that have become incorporated can also be fraudsters.

It is very common for the fraudster to have been working for the business for a decade or more. In such a scenario, it's natural for the business owner to have let his or her guard down. Unfortunately, it is commonly the individuals who are trusted the most who steal the most frequently and embezzle the largest amounts over time.

Impacts of fraud and embezzlement

Over the course of many years of investigation, experts have seen the painful emotional and financial impacts of fraud. The ramifications on the small business go a lot further than simply the money lost as a result of the fraud or embezzlement.

The ramifications include the following:

  • Loss of productivity,
  • The costs associated with replacing an employee who was once valued and trusted, and
  • The cost of aggregating information to give to the authorities for the prosecution of the fraudster.

Prosecution is often not pursued in these cases, and there are a number of reasons for this:

  • The business owners may have lingering feelings of loyalty to the fraudster.
  • They might not want to hurt the person in addition to firing them.
  • They may have feelings of embarrassment at having fallen victim to fraud.

Can You Embezzle Your Own Money Legally?

Whether a business owner can legally be charged with embezzlement from their own business depends on how the business is structured. If you’re the sole owner of a business, the legal system generally views the business’s assets as yours, making it unlikely that you could “steal” from yourself. However, if the business is a corporation, partnership, or has shareholders or co-owners, the assets belong to the business entity—not to any one individual.

In these cases, even founders or majority shareholders can face embezzlement charges if they unlawfully divert company funds for personal use. The key legal element is whether the person misappropriated assets that were entrusted to them in a fiduciary role.

Reasons to pursue prosecution

Experts argue that business owners often have a responsibility to pursue prosecution. In a scenario where multiple shareholders are affected, the business owner has a fiduciary responsibility to pursue prosecution. In order to attempt to recover corporate assets, related reports need to be filed.

It's common for embezzlement to take place in companies that are owned by an individual. In these cases, the decision whether or not to prosecute is a personal one, as there are no other shareholders to consider. It's also important, however, to consider creditors and their rights. This becomes particularly important in scenarios where the embezzlement or fraud that has taken place could mean that the company is not in a position to pay its debts.

Companies should also bear in mind that another benefit of prosecution would be the crime committed by that individual becoming public record. This would protect the fraudster's future employers by ensuring that this information would be revealed if a background check was carried out.

Legal Consequences of Embezzling from Your Own Business

If a business owner misappropriates funds in violation of their legal duties—especially in cases where there are co-owners or shareholders—they may face criminal charges. Possible consequences include:

  • Criminal Charges: Embezzlement is a felony in many jurisdictions, and penalties can include substantial fines and prison sentences.
  • Restitution: Courts may order the embezzler to repay the stolen funds to the business.
  • Civil Litigation: Co-owners or shareholders may bring civil suits for breach of fiduciary duty or fraud.
  • Loss of Business Licenses: Regulatory bodies may revoke licenses or registrations for unethical conduct.
  • Reputational Damage: Embezzlement allegations can permanently damage a professional's or company’s reputation, regardless of the legal outcome.

Common methods of fraud and embezzlement

Fraud can be committed in many ways. The most common method is the embezzlement of cash, but kickback schemes and the misappropriation of goods are also common. Experts advise against the use of signature stamps, having seen many accountants use these as a way of committing fraud. Another activity commonly seen is unauthorized checks being forged. In a recent case, an accountant was found to be forging checks to made-up companies and writing checks to his own business.

Business owners need to understand that proving that a shareholder, partner, or co-owner has been stealing is no small matter. The scenario can affect a company not only financially, but also in terms of its performance. They need to make sure that each stage of the process is carried out carefully, with the assistance of a suitable attorney who will ensure that everything is done according to the letter of the law.

When Is Taking Money from Your Business Considered Embezzlement?

The line between legal withdrawal and embezzlement hinges on authorization and transparency. Here are scenarios where actions may cross into embezzlement territory:

  • Unauthorized Withdrawals: Taking money without board or partner approval in an incorporated or co-owned business.
  • Falsifying Records: Manipulating financial statements or creating shell vendors to hide transfers.
  • Using Company Assets for Personal Gain: This can include personal use of funds, vehicles, equipment, or intellectual property.
  • Intent to Deceive: Prosecutors often look at whether the individual intended to conceal the activity or deprive the business of rightful funds.

Even if someone has partial ownership, acting against internal governance policies or fiduciary obligations can trigger an embezzlement claim.

How to Prevent Internal Embezzlement in Your Business

Preventative controls are essential to safeguard business assets. Consider these steps:

  • Separate Financial Duties: Assign different individuals to authorize, record, and reconcile financial transactions.
  • Implement Regular Audits: Both internal and external audits can deter misconduct.
  • Use Digital Controls: Financial management software with permission levels can help track and limit access to funds.
  • Establish Clear Policies: Create clear written procedures for handling money, reimbursements, and executive approvals.
  • Formalize Ownership Roles: In multi-owner entities, operating agreements or shareholder contracts should clearly define financial responsibilities and restrictions.

Frequently Asked Questions

  1. Can you embezzle your own money from your business?
    You cannot embezzle your own money if you are the sole owner, but if the business has co-owners or shareholders, misappropriating funds can be considered embezzlement.
  2. What type of business structures are most vulnerable to owner embezzlement?
    Partnerships, corporations, and LLCs with multiple members are more vulnerable because funds belong to the business entity, not any one person.
  3. What’s the difference between fraud and embezzlement?
    Fraud is a broad category involving deception for personal gain, while embezzlement specifically involves the misappropriation of entrusted funds or property.
  4. Is it illegal to take money from your LLC?
    If you’re the sole member and follow proper procedures, it’s typically legal. However, unauthorized withdrawals in multi-member LLCs may be illegal.
  5. How can businesses prevent embezzlement by owners or employees?
    Implement internal controls, conduct audits, segregate duties, and establish clear financial protocols.

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