If you have a small business, you may be aware that the State of Connecticut recently updated its rules governing how LLCs operate (the “New CT LLC Act,” effective July 1)—and you may be wondering how, specifically, these changes will impact you and your business. The first thing to know about these updates: Most only apply if your LLC’s operating agreement does not specifically state an alternative.
The Act provides a series of default rules to fill the void if the company’s operating agreement doesn’t specify an alternative. Therefore, LLCs have broad authority to change these default rules by contract, so that the unique needs of the business and its owners are met.
Here are key provisions of the New Act that you may need to consider when it comes to your business:
• Annual Reports
Old Act: Reports were due during the anniversary month of the company’s formation.
New Act: Reports are due between January 1 and April 30 each year.
• Management Structure/Third-Party Notification
Old Act: Third parties could rely on the Articles of Organization, filed with the Secretary of State and made public record, to learn whether the company was member- or manager-managed, and who could sign contracts on the company’s behalf.
New Act: The operating agreement, not the Certificate of Organization, will determine the management structure and decision-making process, such as whether each member can act on behalf of the company; whether a majority/super-majority/unanimous vote is required; and whether there is a manager with the authority to act. This makes the LLC operating agreement even more critical—and you can expect to be asked for copies of it by entities with whom you are doing business, as part of their due diligence.
• Admission of New Members
Old Act: New members could be admitted with a majority vote by the existing members.
New Act: A unanimous vote of the existing members is needed to admit new members. Additionally, newly admitted LLC members agree, by default, to the terms of the operating agreement—whether they have signed it or not.
• Derivative Action
Old Act: There was no right for LLC Members to file a derivative action.
New Act: Members can enforce the rights of the company in certain circumstances through derivative action—important in the event of mismanagement allegations.
Keep in mind that while many of these default rules can be changed through your LLC’s agreement, others cannot. These include:
• Duty of Care/Loyalty: An LLC’s operating agreement must be carefully drafted if the owners expect to engage in outside activities that could compete with the company’s core business. For example, a restaurant owner may be prohibited from buying a competing restaurant unless the other owners specifically agree to allow the owner to do so in the operating agreement.
• Use of Information: The New Act strengthens the LLC members’ rights to access company information, but allows the operating agreement to apply standards to the use of that information. For example, members can access financial information about the company, but the operating agreement may protect the confidentiality or limit the use of that information.
The bottom line? It’s a sound business practice to review your operating agreement regularly—and now is the perfect time to do so, to ensure it’s in compliance with the New Act.
Companies should not only make sure that their agreements will hold up under the new rules, but also that they still reflect the way the company is actually run. Rucci Law Group is here to help companies conduct this review in the most comprehensive, yet efficient, way possible.