Shareholder Rights: Unlawful Personal Use of Company Funds

Is a Company Leader Using Company Funds Like a Personal Piggy Bank?

Is your business partner, your CEO, or another company leader using company funds for personal purposes? I have seen this many times. Often it is majority shareholders, CEOs, and general partners who were entrusted to manage the company’s resources.

A misuse of company funds for personal purposes is clearly illegal. It is unlawful use company funds like a personal piggy bank. In legal terms, it is a breach of fiduciary duty to misuse funds, especially for one’s own benefit.

For example, WCCO highlighted this issue in a story involving the CEO of a popular Minneapolis restaurant: Seven Restaurant’s Main Owner Sued.

Legal Doctrines

The personal use of company funds may be relevant to a number of legal doctrines:

  • Breach of the fiduciary duty of loyalty
  • Breach of the fiduciary duty of care
  • Misappropriation
  • Conversion(converting company funds to personal use)
  • Fraud(against the company)
  • Tax Fraud (against the government)

Legal Use of Company Funds for Personal Purposes

It’s not always illegal to use company funds for personal purposes. It is possible to use company funds for personal purposes, but doing so requires the following parties either authorize it or are not defrauded by it:

  • Tax authorities (IRS, state government, etc.)
  • Owners of the company (shareholders, partners, LLC members, etc.)
  • Creditors (creditor rights commonly arise in instances of fraud or bankruptcy)

Courts will scrutinize any authorization of using company funds for personal purposes.

One well-known example was Enron CFO Andrew Fastow using LJM Cayman L.P., a company owned by Mr. Fastow, to collect management fees from Enron. This company siphoned millions of dollars into Mr. Fastow’s pocket. Enron purportedly authorized this, claiming this arrangement did not “adversely affect the interests of Enron.” However, this self-serving corporate structure came under close scrutiny when creditors and shareholders were defrauded by Enron.

Attorneys experienced in this area can advise companies on how to use company funds for personal purposes in compliance with the law. This includes ensuring other stakeholders authorize the transaction after a full disclosure of all important information. This also includes avoiding a violation of tax laws. There is a proper way for a company to pay an individual, but it cannot be done in secret.

Shareholder Rights

Shareholders have a variety of rights when an owner or officer of the company is misusing company funds for personal purposes. You can learn more about business owner rights and duties, including how to enforce your rights, in these articles: