Suppose you’re starting a business and forming a limited liability company (LLC) in Connecticut. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is particularly important if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit, and loss distribution percentages, and how proceeds are divided if the business is sold. An operating agreement also defines how decisions will be made and how member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Without an operating agreement, Connecticut laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Connecticut Operating Agreement Include?
For LLCs established in Connecticut, a well-structured Operating Agreement serves as the cornerstone for defining member interactions and company operations. Let’s delve into the essential components that should be incorporated to align with Connecticut’s legal standards.
- Each member’s rights and responsibilities: In Connecticut, the operating agreement should clearly detail each member’s duties, roles, decision-making authority, and specific obligations within the LLC.
- Capital contribution requirements for each member: Spell out the specific monetary or asset contributions each member is required to make, which can be foundational in determining their ownership percentage in the LLC.
- Procedures for adding and removing members: Connecticut law provides some guidance, but your agreement can refine these points, such as by setting forth voting requirements or buy-in processes for new members.
- What happens when a member sells their interest, becomes disabled, or dies: Establish the processes for events like buyouts, transfers to beneficiaries, or a possible sale to other existing members.
- Conditions under which a member might become bankrupt or insolvent: Address how the LLC will handle a member’s financial difficulties and the potential impacts on the LLC’s operations.
Management and Voting:
- Management structure and roles of members: Connecticut allows for either member-managed or manager-managed structures. Clearly outline which model you’re adopting and the roles and responsibilities therein.
- Voting rights of each member: Define how voting power is distributed, whether based on ownership percentage, capital contribution, or another metric.
- Rules for meetings and voting: Describe the frequency of meetings, how meetings are called, and the processes for voting on LLC decisions.
- Rules for managing potential conflicts of interest among members: Set guidelines to ensure decisions are made in the best interest of the LLC, especially when a member’s personal or business interests might conflict.
- Allocation of profits, losses, and distributions: Determine how the LLC’s financial outcomes are distributed among members, which can be based on capital contributions, ownership stakes, or other criteria.
- Provision for periodic financial audits or reviews: Define the frequency and nature of any financial reviews or audits to maintain transparency and fiscal responsibility.
- Tax treatment of the LLC: While Connecticut LLCs have default tax classifications, your operating agreement can specify if you’ve opted for a different tax classification, like being taxed as a corporation.
Changes and Amendments:
- Process for amending the operating agreement: Detail the procedure for proposing changes and the voting requirements for approval.
- Guidelines for company management during transition events: If there’s a significant change, such as a founding member’s departure, outline how the LLC will navigate these changes.
- Conditions under which the LLC might be sold or merged: Specify the conditions and processes for significant business decisions like mergers or acquisitions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Opt for alternative dispute resolution mechanisms, like arbitration or mediation, to avoid litigation where possible.
- Guidelines for non-compete and confidentiality agreements: Establish terms that protect the LLC’s interests by preventing members from competing unfairly or disclosing confidential information.
- Provision for indemnification and limitation of liability: Define the protections for members against potential lawsuits or claims related to their roles in the LLC.
Record Keeping and Communication:
- Details about record keeping requirements: As per Connecticut law, ensure the necessary records are maintained, including details of capital contributions, distributions, and more.
- Guidelines for how company-related decisions will be documented or communicated: Establish protocols for maintaining meeting minutes or documenting significant decisions.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Clearly define the core activities and objectives of the LLC.
- Identification of the registered agent and office: Every Connecticut LLC must designate a registered agent and principal office. Include these details in the agreement.
- Procedures for dissolving the LLC: Outline the steps required to close the LLC’s operations, ensuring compliance with Connecticut’s dissolution procedures.
- Procedures for winding down or liquidating the company’s assets: Upon dissolution, describe how assets will be liquidated and how the proceeds or remaining debts will be distributed among members.
How to Draft a Connecticut Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
If your business has multiple members, you should consider having an attorney draw up your operating agreement. An attorney will ensure that all bases are covered, and all members’ rights are protected. They can also include language that is specific to Connecticut laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of organization. The certificate of organization officially forms your LLC with the state and includes no information about member roles or financial interests.
Also, the certificate of organization is filed with the state and is part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Connecticut Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is fully up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Connecticut, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in Connecticut?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Connecticut LLC does not have an operating agreement?
Connecticut default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.