Effective July 1, 2017, Connecticut has a new law controlling limited liability companies. An LLC is a business entity like a corporation and one of its’ purposes is to insulate the member of the LLC from creditors. If you conduct business as an LLC, a lawsuit cannot reach your personal assets. Only the assets of the LLC are exposed. Of course, an LLC does not insulate a doctor or lawyer from professional negligence.
Many people use LLCs to hold real estate. For instance, if you own a business and the real estate on which it is located, you might own the business as a corporation but own the real estate in an LLC. We have clients who own their vacation home in an LLC.
LLCs can have an income tax advantage over corporations in that they are usually taxed as partnerships or sole proprietorships instead of as corporations. Thus, losses of the LLC are fully deductible. Many new businesses, professionals, and consultants operate as an LLC for this reason. Members of LLCs remain subject to self-employment taxes. Like a corporation, an LLC allows you to set up both retirement funds and life insurance policies with greater contribution limits so you can set aside money for your future and your family. LLCs do not have as many formalities as a corporation.
The Connecticut Uniform Limited Liability Company Act (known as “CULLCA”) sets default rules for how an LLC is to be run. If you do not have an Operating Agreement, the provisions of CULLCA apply. The new law does not void any existing Operating Agreement or any provisions of a new Operating Agreement except to the extent that the Operating Agreement violates Section 5(c) of the new law. Under Section 5(c), an Operating Agreement may not:
(1) Make the law of another state govern a Connecticut LLC;
(2) vary a limited liability company’s capacity to sue and be sued in its own name;
(3) vary any requirements of the Connecticut Secretary of State’s Office;
(4) vary the right to petition the Connecticut Superior Court to record a document on the records of the Connecticut Secretary of State’s Office;
(5) alter or eliminate the duty of loyalty or the duty of care, except in certain limited situation under Section 5(d);
(6) eliminate the implied contractual obligation of good faith and fair dealing except that the operating agreement may prescribe the standards, if not manifestly unreasonable, by which the performance of the obligation is to be measured;
(7) relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or knowing violation of law;
(8) unreasonably restrict the duties and rights of members in member-managed LLCs to information about the operation of the LLC, except that the operating agreement may impose reasonable restrictions on the availability and use of information obtained and may define appropriate remedies, including liquidated damages, for a breach of any reasonable restriction on use;
(9) vary the provisions of the new law related to judicial dissolutions;
(10) vary the requirement to wind up the company’s activities and affairs as specified in the new law;
(11) unreasonably restrict the right of a member to maintain a legal action against the LLC or its members;
(12) vary the provisions related to derivative actions under the new law, except that the operating agreement may provide that the company may not have a special litigation committee;
(13) vary the required contents of a plan of merger or, a plan of interest exchange as allowed by the new law; or
(14) except as provided Sections 6 and 7(b) of the new law, restrict the rights of a person other than a member or manager.
Connecticut LLCs no longer have Articles of Organization. You now file a Certificate of Organization with the Connecticut Secretary of State’s Office. The new Certificate of Organization does not have to state if the LLC is a member-managed LLC. The Operating Agreement now controls whether the members manage the LLC or a manager manages the LLC. The new Certificate of Organization no longer requires you to state the purpose of the LLC. That information belongs in the Operating Agreement. The terms of the Operating Agreement control over the Certificate of Organization. We recommend that all LLCs have an Operating Agreement so that you consciously make decisions on how to operate your LLC.
The new law spans 102 sections. It covers everything from setting up an LLC, operating the LLC, merging it with another LLC, and dissolving the LLC. If you want to understand how the new law affects your business or real estate, you should consult a Connecticut attorney who is willing and able to digest and explain how this new law affects you.