. John, Lesa, and Trevor form a limited liability company. John contributes 60% of the capital, and Lesa and Trevor each contribute 20%. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60% 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? Assess fully.
Limited Liability Companies. John, Lesa, and Trevor form a limited liability company. John contributes 60% of the capital, and Lesa and Trevor each contribute 20%. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60% 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? Assess fully.
In a limited liability company (LLC), the law typically allows for flexibility in how profits are allocated among the members. However, if the LLC operating agreement is silent or unclear about profit distribution, disputes may arise, as in this case. Let's address each part of your question.
1. What law will the court apply?
In this scenario, the court will likely apply the law of the state where the LLC was formed. Each state has its own limited liability company statutes, which provide default rules for various aspects of LLC operations, including profit distribution when not specified in the operating agreement.
2. In most states, what will result?
In most states, if the operating agreement is silent on profit distribution, the default rule is that the profits will be distributed equally among the LLC members. This means that Lesa and Trevor's assumption of equal profit distribution would likely be upheld by the court.
3. How could this dispute have been avoided?
To avoid such disputes, it is crucial to have a well-written and comprehensive LLC operating agreement. The operating agreement should explicitly address profit distribution and clearly outline the agreed-upon percentages or methods for allocation. By clearly specifying the distribution of profits based on capital contributions or any other agreed-upon criteria, potential conflicts can be prevented.
In this case, the dispute could have been avoided if the LLC members had proactively discussed and agreed upon profit distribution during the formation of the LLC. They could have clearly defined how the profits would be allocated, taking into account their respective capital contributions and any other factors they deemed relevant. By doing so, they would have had a legally binding agreement that would have guided the distribution of profits and eliminated ambiguity or differing assumptions.
To summarize, the court would likely apply the state's LLC statutes, which generally default to equal profit distribution when not specified in the operating agreement. This dispute could have been avoided if the LLC members had created a comprehensive operating agreement that clearly addressed profit distribution based on their agreed-upon terms.