2. Sally and Tom decide to go into business, which they call “Pelatone,” which manufactures and...

2. Sally and Tom decide to go into business, which they call “Pelatone,” which manufactures and sells exercise bicycles. They sign a partnership agreement that requires Sally to contribute $100,000 and Tom to contribute $140,000 in capital to start the firm. The partnership agreement says nothing about the management of the firm or the division of profits. Without Sally’s knowledge, Tom informs the owner of United Wheel Co, that he represents the Pelatone and signs a large contract with United to buy wheels to be used on Pelatone’s bicycles. In its first year of operations, Pelatone makes a profit of $240,000.

1. What are the Tom’s and Sally’s rights with respect to the management of the firm?

2. Is Pelatone bound to the contract with United? Why or why not?

3. How should Pelatone’s first year’s profits be divided between Tom and Sally? Why?

Expert Solution

1. Since the contract does not specify anything clearly about the the management of firm, hence it is by default assumed that Tom and Sally will be equally responsible and have equal rights for the management of firm. In the absence of any clear specifications mentioned in the contract, equal rights are provided by default to both the partners.

2. In my opinion, Pelatone is not bound by the contract with United since the contract was signed by Tom without any knowledge of Sally. Since both the partners were not aware about such a contract and both the partners have equal rights on the management of firm, hence this contract shall be treated as null and void.

3. Pelatone's first year profits shall be divided in a similar ratio as per the contributions made by both the partners in staring the firm. This is because in the absence of clarity in the contract about division of profits, it is by default assumed that profits are to be divided in the ratio of capital invested in the firm by both the partners. In this case, since Sally has invested $100000, hence she would get $100000 in profits and Tom shall get $140000 in profits as he had invested $140000.

keosha answered 3 months ago

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