Generally, there are two sources to determine the rights and duties of members of a Connecticut limited liability company (“LLC”). The first source is an operating agreement. The ability to form a limited liability company (“LLC”) as a legal entity in Connecticut derives from legislative enactment. Title 34 of Connecticut General Statutes covers LLC’s. Title 34 gives great deference to the members of an LLC in forming an agreement on governance of the LLC. Statutory deference creates flexibility and is one of the biggest advantages when choosing a LLC as an entity for a business.
The members’ agreements on governance of the LLC are typically documented in a written agreement known as an operating agreement. These agreements are typically drafting by a business attorney. The operating agreement for a LLC will typically document the rights and duties of members and managers for LLC’s. An operating agreement is similar to a partnership agreement. An operating agreement can be simple or complex depending on the needs of the members.
Operating agreements can alter or change the statutory rights of members or managers. Members by agreement can define the voting rights of members, the number of votes required to decide matters, and the manner in which managers can be appointed or removed. Members can also agree upon limitations on ownership interests such as transfer of ownership or withdrawal of members. Members further can agree upon duties of managers and members.
Unexpected problems sometimes arise when an operating agreement is silent on rights and duties. When an operating agreement is silent, the second source to determine rights and duties of members is Title 34. You might consider Title 34 to govern by default unless otherwise agreed upon by the members.
Connecticut General Statutes 34-140 to 34-144 covers the rights and duties of members and managers. If the operating agreement of a Connecticut LLC is silent on the issue, the following is an example of governance rules:
- If the LLC is governed by managers, the vote of more than one-half the number of managers will decide most matters with the LLC
- If the LLC is governed by members, the majority vote of the members in interest will decide most matters with the LLC
- Majority of members in interest can vote and designate a manager
- Any and all managers may be removed with or without cause by vote of a majority of the members in interest
- Absent proper consent, every member and manager must account to the LLC and hold as trustee for it any profit or benefit derived by that person from transactions connected with the LLC or through use of confidential or proprietary information of the LLC
- The vote of two-thirds of the members in interest is sufficient to amend the operating agreement
· The vote of two-thirds of the members in interest is sufficient to amend the operating agreement
The take away here is to use the operating agreement to document how you want to run the LLC. Consult an attorney to help draft the operating agreement. If you fail to do it, the Connecticut legislature will decide how to run the business for you. This may have unintended consequences.