My name is XXXXX XXXXX I'd be happy to answer your questions today. I'm sorry to hear about your situation.
There are a few courses of action that can be taken. First, you can file a police report - he is embezzling, and that is illegal. He could go to jail. If he is prosecuted, he could be ordered to repay the monies taken.
The second option is to sue him for any monies taken in excess of the 40% he is entitled to. Once that's done, dissolve the company and pay him nothing, since he already took it. You can also ask him to sign something stating that he will not seek any money as part of the dissolution in exchange for you not suing him/pressing charges for the money that he took. He might be willing to agree to that, and you wouldn't have to pay him anything else.
If you just dissolve the company without mentioning the embezzlement, he can sue for his 40% of the profits. If you don't have evidence that he was stealing (or if he manages to hide/destroy it before you get to court), then you could be ordered to pay him everything. So, it may be better to try to negotiate a deal with him where he waives his 40%. If you would like to continue to operate the company yourself, another option would be to have him sign an agreement stating that you are buying out his interest in the partnership, in exchange for monies already received.
You may want to consider having a lawyer negotiate/draft the agreement on your behalf, to make sure that you are 100% covered. A good place to find someone is http://www.martindale.com
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