How to Create an Operating Agreement in Connecticut

A Connecticut LLC operating agreement isn’t required by the state, but it’s an important tool for protecting your business. This document outlines ownership, member responsibilities, and how major decisions are made, helping prevent disputes and keeping operations clear. In this guide, we’ll cover why your LLC should have one and what to include.

An LLC operating agreement is a document that defines how a business will run, who its primary members are, and what rights and responsibilities they can expect as participants in the company. All members of an LLC (limited liability company) have to agree to the operating agreement for it to be valid, and it’s an excellent tool for ensuring harmony and smooth sailing in months or years to come.

While Connecticut does not legally require an LLC operating agreement, having one is highly recommended. So if you’re opening an LLC in Connecticut, this is something you should consider.

What is an LLC Operating Agreement?

Although it is a relatively short document compared to extensive legal testaments, an LLC operating agreement is nevertheless a binding contract that mandates how a company will run and how its members will behave. It clarifies the roles and responsibilities of those business members, major financial and operational decision-making, and what to do in times of strife.

The operating agreement is an internal document. That means you don’t have to figure out how to file it with the Secretary of State. Instead, you just keep it on hand so that all members of the LLC, both now and in future, understand the basic governing principles and the business and adhere to them. This protects everyone by setting expectations.

There are several other reasons an operating agreement is important as well.

Why is an Operating Agreement Important for Connecticut LLCs?

The benefits of an operating agreement are myriad, helping everyone understand their roles and giving them a piece of paper to which to refer in confusing or contentious times. Other key benefits include:

• Clarifying the ownership stakes of each LLC member, as well as their voting rights
• Helping to further separate the LLC from its individual members legally, which may prove very important in bankruptcy or legal cases
• Protecting the business after its owner(s) pass away
• Providing documentation that some banks, lenders, and investors require

If, on the other hand, you decide not to put an operating agreement in place, you risk misunderstanding, disagreement, contention, or legal disputes. The truth is, even plain old hurt feelings and broken relationships can be prevented by some good expectation-setting, so why wouldn’t you take the time to put it in place?

Key Components of a Connecticut LLC Operating Agreement

As there is no legal requirement to create an LLC in the first place, there are no strict legal requirements for what one would contain. Because LLCs are meant to provide protection against certain undesirable outcomes, however, they benefit from the same basic contents no matter what. These include, but aren’t limited to:

Ownership structure

All LLCs are different, which is why it’s good that operating agreements are so flexible. For instance, some LLCs have only one member, while others have a dozen or more. These are listed in the operating agreement.

Moreover, these members all bring different amounts of capital and time to the table, so the ownership structure will reflect who owns what percentage of the company.

Member roles and responsibilities

Roles and responsibilities also vary among members. Sometimes, but not always, this is related to the amount of their capital investment. The operating agreement will list off their titles, what rights and duties are affiliated with that role, and anything else deemed relevant.

Voting rights and decision-making

It also matters how decisions get made at an LLC, and you don’t want to leave this up to chance or verbal agreements that could be misinterpreted. Instead, use an operating agreement to record exactly how you will approach financial or operational decisions, who gets a vote, and how much their vote is worth.

Profit and loss distribution

How will profits get disbursed to members? How will losses get divided for tax purposes? Both of these questions are important. When it comes to profits, the reason why is obvious. However, losses matter too. When the business takes a loss, this often funnels on to individual members, who can use it to save money on their taxes.

Dissolution terms

In the event you want to sell or dissolve the company, the method in which this will occur should be listed in the operating agreement.

How to Create an LLC Operating Agreement in Connecticut

Creating an LLC operating agreement is a flexible process, but the basic steps are as follows:

1. Gather all LLC members and discuss the most important aspects of your business, financially and operationally.
2. Write down and consider all opinions, compromising where necessary.
3. Draft an initial operating agreement and circulate it amongst your members, soliciting opinions.
4. Make the changes, discussing as necessary.
5. Circulate the operating agreement again to ensure that everyone’s needs have been met.
6. Sign the operating agreement.
7. If so desired, get it notarized.
8. Produce enough hard copies for everyone, then mail digital copies to all members as well.
9. Keep a copy with the rest of your LLC paperwork.

If needed, you can also amend your operating agreement using the same basic process to produce a new, updated document that reflects any changes in the business since the initial draft.

Drafting an operating agreement is pretty straightforward, but there are several factors important to keep in mind. If you don’t feel confident preparing legal documents, you might want to consult a legal professional.

Connecticut-Specific Considerations

Connecticut is governed by the Connecticut Uniform Limited Liability Company Act, also known as CULLCA. CULLCA covers businesses that do not have operating agreements in place, mandating that certain steps be taken in the event of their deaths. Specifically, the heirs of the deceased’s estate have the right to distributions from the company but not to continue running the company, meaning they will have to finish whatever business tasks are ongoing before dissolving it.

If you wish to pass your business on to your heirs or have another plan for its stewardship after you’re gone, you must put an operating agreement in place to designate what will happen. The importance of this cannot be overstated: Your heirs will have absolutely no decision-making rights if your business defaults to CULLCA regulations.

For this reason, and the ones stated above, it’s critical that you take your operating agreement seriously and put one in place today. If you find legal documentation a bit scary, never fear: There’s a professional for that.

Final Thoughts & Next Steps

Operating agreements are invaluable for their ability to protect members of the LLC, provide guidance in troubled times, determine the LLC’s fate in the event of its members’ death, and chart a safe and productive course into the future.

If you don’t yet have an operating agreement in place, it’s time to get one. Please feel free to get in touch today for expert help that will keep your business on its feet, from inception to that final retirement party. We’re standing by!

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