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.
Q1) What will be the result?
Q2) How could this dispute have been avoided in the first place?
Deidre McFadden came to the offices of Webber & Associates seeking help in organizing her business, Fashion Angels, a toy-making enterprise focusing on dolls with multiple outfits. She wants to run the business and has few personal assets so is not worried about personal liability. Deidre’s aunt, Penelope, is elderly, wealthy, and adores her only niece. Penelope is willing to invest $500,000 to start the business, and Deidre has $10,000 to contribute on her own. Deidre expects to do all the work without compensation as it will take at least a year before Fashion Angels will make any profit. Penelope will sign any agreement terms, with one condition. Penelope is insisting that Deidre cannot leave the company, stating “I don’t want my money going to a stranger, it’s for Deidre.”
Deidre is looking for your advice as to the type of entity that would suit her best. “I don’t want my aunt to become the target for bill collectors if I fail. And to be honest, I really don’t want her interfering in the business because she can be quite aggressive.”
Q1) What advice would you give Deidre?