Question

John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the capital, and Lesa and Trevor 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 Trevor, 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?

Answer 1

In most states, without a specific operating agreement, an LLC's profits are divided equally among members, regardless of capital contribution. A court would likely decide in favor of equal profit-sharing. Such disputes can be avoided by creating a clear operating agreement at the inception of the business.

Step-by-step explanation:

Regarding the question on how a court would decide on the profit division in a limited liability company where the members contributed different amounts of capital but did not agree on profit-sharing, the law applied would typically be the default state LLC statute since no specific agreement was put in place. In most states, unless an LLC agreement (also known as an operating agreement) specifies otherwise, profits are divided among members equally, not based on the proportion of capital contribution. Therefore, Lesa and Trevor's assumption is likely to prevail in court.

To avoid such disputes, it is critical that members of an LLC create and agree upon a detailed operating agreement that clearly specifies the terms of profit division and other operational procedures before starting their business endeavors. This preemptive measure ensures that each member's expectations are legally documented and can prevent costly misunderstandings.

Answer 2

1: In court, the partners will earn returns based on the contribution of each partner. In this case in the ratio of 60:20:20

2: In most states the Uniform Partnership Act applies.

3: The problem would have been avoided if all partners came together to prepare a Partnership Deed to bind each.

Step-by-step explanation:

Partnership deed is an agreement entered into by all partners to guide the operation of the partnership agreement. It also helps in preventing dispute.