Ariana, Bella and Elsa are three good friends who formed a business selling designer clothes imported exclusively from Europe. The three friends registered their business as a general partnership under the name, ‘Fabulously You!’.
The three partners signed an agreement to share profits and losses in the proportion of 40% (Ariana): 40% (Bella): 20% (Elsa). Ariana and Bella work in ‘Fabulously You!’ on a full time basis, with Ariana as the managing partner. Elsa is a wealthy housewife, and she is happy to let her two friends manage the business while she travels around the world with her husband.
The partnership agreement expressly states that the object of the business is to sell clothes imported only from Europe and prohibits the sale of any articles other than clothes for the time being. If any one of the partners wants to sell articles other than clothes, she must seek the approval of the other partners in the partnership.
Ariana gave birth to a baby six months ago and has been on extended maternity. Bella has been left to manage the shop alone. Business has been quite slow due to the depressed economy. In order to boost revenue, Bella decided to import some fashionable clothes from Korea. The response has been good for this line of clothing from Korea. Emboldened by her business strategy, she ordered a new shipment of clothes from a Korea supplier totalling $10,000. In order to further boost revenue, she also started buying semi-precious gemstones and jewellery to complement the clothes. She ordered $20,000 worth of gemstones and jewellery from My Precious Jewel Pte Ltd.
Business continues to be slow, and ‘Fabulously You!’ is unable to meet payments to the Korean supplier and My Precious Jewel Pte Ltd. The Korean supplier and My Precious Jewel Pte Ltd are furious with Bella. They found out about Ariana and Elsa being the other partners, and they want Ariana and Elsa to pay for the overdue accounts.
Explain to Ariana and Elsa if they are liable to pay for both the overdue accounts.
(15 marks)
(b) Distinguish how the business of ‘Fabulously You!’ would be run and managed if it were a limited liability partnership as compared to its existing structure as a general partnership. In your answer, you are expected to also explain whether your answer in (a) above would be different if ‘Fabulously You!’ were registered as a limited liability partnership.
