Business Scenarios and Case Problems 19-1. Limited Liability Companies. John, Le
ID: 2580426 • Letter: B
Question
Business Scenarios and Case Problems 19-1. Limited Liability Companies. John, Lesa, and Trevor the d form a limited liability company. John contributes GO percent of the capital, and Lesa and Trevor each contribute 20 percent. unp Nothing is decided about how profits will be divided. John h 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? 1s Discuss fully. (See Limited Liability Companies.) Torme Faraway Corp. supplies businesExplanation / Answer
Every state has formulated Limited Liability Companies laws for regulating the Limited Liability companies (LLC's). LLCs are governed by the rule of state in which they are formed. The court will refer to that relevant law for solving the dispute between John, Lisa and Trevor.
Generally, State rules provide for the allocation of LLC profit according to each member's percentage of ownership interest. These state rules are default rules, however, if the members agreed on a different profit allocation arrangement then profit would be allocate on that agreed basis.
In the given case the contribution of all the three members is in the ratio of 60:20:20 and there is no agreement between the members on distribution of profits. Thus the ownership criteria should be used for allocation of profits. Thus John will be entitled for 60% of profits and Lesa and Trevor will be entitled for 20% of profits. Thus John's contention is right.
In this case the dispute arises between the LLCs members because there is no operating agreement between the members on distribution of profits. If they had agreed for allocation of profits, the dispute would have been avoided.
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