Question

Select 1 of the scenarios and:

1. Identify the appropriate Rule

2. Apply the Rule

3. Explain your Conclusion

Option 2: Limited Liability Company

John, Lesa, and Tabir form a limited liability company. John contributes 60 percent of the capital, and Lesa and Tabir each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Tabir, however, assume that the profits will be divided equally. A dispute over the profits arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result? How could this dispute have been avoided in the first place? Discuss fully.

Answer 1

In this case, partnership law will be applicable. Since there was unequal investment made by the three partners, hence the profits would be divided in the ratio of investment made by each of the partners. In this way, John would be entitled to 60 percent of profit sharing and Lisa and Tabir would be entitled to 20 percent each. This is in line with the investment made by each of them in setting up the business. In most states, same result would be there and profit sharing would be in the same ratio as investment. This dispute could have been avoided in the first place by the partners themselves deciding the profit sharing among them and as per standard practice, they should have shared profits in the ratio of investment made.