When looking for a Connecticut limited liability company attorney it is important to have that attorney review all your formation documents, understand your business, and then prepare a carefully drafted operating agreement and the necessary resolutions. It is good to start off on the right foot and if you have one or more partners the importance of a well thought out operating agreement cannot be stressed enough. Having all issues discussed among the partners and addressing them in the operating agreement will prevent prolonged disputes in the future.
What is an Operating Agreement?
Every LLC in Connecticut should have a well thought out operating agreement, whether it is one member or 5 members or more. An operating agreement is basically an agreement among partners detailing their respective rights and responsibilities and so in a way also acts as a management agreement between those partners. There are numerous issues that are involved when two or more parties get together to agree on a written contract between them.
Every operating agreement should be crafted to meet the specific business needs of the parties. It should also explain in simple terms the specific understanding of the parties involved regarding the running of the business. What does it provide in the event of disagreements and how they will be handled? How will disagreements be resolved without delay and in an amicable manner with minimal impact and delay in the daily operations of the business? I do not recommend using a boiler plate form found on the internet, although that may be used as a starting point to do some research before contacting a Connecticut limited liability company attorney to have your operating agreement drafted.
Every operating agreement should be crafted to meet the specific business needs of the parties. It should also explain in simple terms the specific understanding of the parties involved regarding the running of the business. What does it provide in the event of disagreements and how they will be handled? How will disagreements be resolved without delay and in an amicable manner with minimal impact and delay in the daily operations of the business? I do not recommend using a boiler plate form found on the internet, although that may be used as a starting point to do some research before contacting a Connecticut limited liability company attorney to have your operating agreement drafted.
Key Terms to Include in an Operating Agreement
Some key questions that need to be answered in every operating agreement include:
- Roles and responsibilities of the members and managers.
- Voting rights.
- Will the members draw salaries or only be paid from the profits?
- How will new members be added?
- How will competing business interests and conflicts of interests be handled?
- How are potential offers to sell the business handled?
- How are capital contributions handled if additional capital is needed?
- How are decisions to expand the business or make other acquisitions handled?
- What if a member defaults in his or her duties? Can they be bought out?
- How are disputes among the members to be resolved?
- Can a member or manager be replaced for violation of the operating agreement?
- Can a member sell his or her interest to a non-member?
- What if a member passes away or is disabled and can no longer work?
- Is key man insurance necessary?
- How is a potential buyout between members handled?
- How is the decision to dissolve the LLC made?
The Importance of a Term Sheet When Drafting an Operating Agreement
If the limited liability company will be owned by a single member as a sole proprietorship, a term sheet is not necessary. As a Connecticut limited liability company attorney, I often prepare a term sheet of the basic terms and conditions for the parties to review and discuss. After the term sheet is agreed upon, I then draft the Operating Agreement for them to review. It is important to make sure the parties are in agreement on the main and most important terms before beginning to draft the operating agreement and wasting time and money. On a rare occasion, I have encountered partners that were not in agreement and therefore the partnership fell apart before the limited liability company was even formed, this saving everyone time, money, and aggravation. BOTTOM LINE: When there are two or ore partners in an LLC, I always start with a term sheet.
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Is your company in need of a business lawyer in Connecticut? Maybe you simply need guidance forming a new business, preparing contracts or drafting a partnership agreement. Regardless of your need for business law advice, depend on Joseph B. LaRocco for the experience and knowledge you deserve to provide you with the comprehensive legal aid you need. Mr. LaRocco is a business lawyer that assists clients with business formations, business contracts, as well as the sale, purchase, or advice on a partial sale or addition of new partners to a business venture.
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Does it Really Matter What Type of Business the LLC Will be Conducting?
A Connecticut LLC attorney will take into account the specific type of business you are operating and raise possible future issues so that the partners to the LLC can discuss them and include language on how certain issues will be handled, if and when they arise. For instances, different issues arise if the business of the CT LLC is a restaurant versus a construction company or auto service station. Also, are you sure you don't need a license in Connecticut for the type of business you will be operating? Do you need a Connecticut tax id number form the Commissioner of Revenue Services? What is a "nexus state" and do you need to get other state tax id numbers, report to those states, and pay the taxes to them as well?
What About a Sole Owner or Single Member LLC?
Even if you are a sole owner of a Connecticut limited liability company (LLC), it is important to have all your LLC documents in order. Some people think that a sole owner of an LLC doesn’t need to have an operating agreement or resolutions because there is only one owner.
It is just as important, if not more important, for single member LLCs to have all their ducks lined up in a row with a proper operating agreement and corporate documents. The reason is because in Connecticut, as in most other states, an attorney can make a claim against you personally in an attempt to “pierce the corporate veil” of your LLC and go after your personal assets. If you have never heard the term before, the basic principal of piercing the corporate veil is that the person set up the LLC or other corporate entity in an attempt to hide assets and perpetrate fraud on others through a protected legal entity. While courts in Connecticut will only pierce the corporate veil of an entity in exceptional circumstances, it is still something you do not want the court to even question based on your failure to have proper documents in order.
Using a Connecticut limited liability company attorney can help you avoid personal liability when someone sues you and tries to pierce your corporate veil. If you failed to use an operating agreement and corporate resolutions to conduct your single member LLC, the court may look at your business as being a mere shell, serving no legitimate purpose, and used primarily as a vehicle to perpetuate fraud or promote injustice on others.
Be aware that some attorneys will attempt to pierce the corporate veil simply as a tactic to gain leverage in a lawsuit against single member LLCs, even ones that run a legitimate business, as most of course do. The attorney suing you will try to claim that because their client was harmed in a breach of contract matter or in a dispute over a home improvement contract that this constitutes a fraud and the LLC is being used as a vehicle to perpetuate that fraud. In my book, breach of contract is simply that and if a job was allegedly done in a negligent manner, well that is just negligence.
The point I am trying to make is single member LLCs need to have proper documentation so that plaintiff’s attorneys can’t run all over them when the defendant fails to produce proper corporate documentation and it appears like the LLC was simply being run as a “sole proprietorship”. Don’t get caught off guard. Use an experienced Connecticut limited liability company attorney to protect yourself ad your assets.
It is just as important, if not more important, for single member LLCs to have all their ducks lined up in a row with a proper operating agreement and corporate documents. The reason is because in Connecticut, as in most other states, an attorney can make a claim against you personally in an attempt to “pierce the corporate veil” of your LLC and go after your personal assets. If you have never heard the term before, the basic principal of piercing the corporate veil is that the person set up the LLC or other corporate entity in an attempt to hide assets and perpetrate fraud on others through a protected legal entity. While courts in Connecticut will only pierce the corporate veil of an entity in exceptional circumstances, it is still something you do not want the court to even question based on your failure to have proper documents in order.
Using a Connecticut limited liability company attorney can help you avoid personal liability when someone sues you and tries to pierce your corporate veil. If you failed to use an operating agreement and corporate resolutions to conduct your single member LLC, the court may look at your business as being a mere shell, serving no legitimate purpose, and used primarily as a vehicle to perpetuate fraud or promote injustice on others.
Be aware that some attorneys will attempt to pierce the corporate veil simply as a tactic to gain leverage in a lawsuit against single member LLCs, even ones that run a legitimate business, as most of course do. The attorney suing you will try to claim that because their client was harmed in a breach of contract matter or in a dispute over a home improvement contract that this constitutes a fraud and the LLC is being used as a vehicle to perpetuate that fraud. In my book, breach of contract is simply that and if a job was allegedly done in a negligent manner, well that is just negligence.
The point I am trying to make is single member LLCs need to have proper documentation so that plaintiff’s attorneys can’t run all over them when the defendant fails to produce proper corporate documentation and it appears like the LLC was simply being run as a “sole proprietorship”. Don’t get caught off guard. Use an experienced Connecticut limited liability company attorney to protect yourself ad your assets.
Can an Operating Agreement specify how Disputes will be Resolved?
As a Connecticut limited liability company attorney I am sometimes contacted by a future client that needed dispute resolution legal services from me because there either was no operating agreement at all, or the parties simply signed some boiler plate operating agreement they got off the internet and never really understood what they were signing. The operating agreement should specify whether or not disputes will be settled by arbitration or litigation. It should also make clear that the law of the State of Connecticut shall apply. If the parties agree to settle disputes through arbitration, then they need to agree on which arbitration company will be uses or how the arbitrator will be selected. After discussing the pros and cons of litigation and arbitration most of my clients chose arbitration instead of litigation. It is more cost efficient and moves much faster than court proceeds and waiting for a trial date that could be two or three years down the line. Usually, my clients decide on a one person arbitrator, although some of my larger clients that are in the construction industry favor a three person arbitration panel.
Another option some of my clients have agreed upon is mediation. The basic terms I include are that the parties must agree on a mediator or use the American Arbitration Association process to choose a mediator. Mediation is non-binding and allows each person to tell their side of the story and present pertinent evidence for the mediator to review. If the parties involved in the dispute are individuals, they can actually represent themselves and make their presentation to the mediator, although that is not recommended. Once the mediator renders a decision, since it is non-binding, the parties can decide to accept it, reject it in total, or agree on some middle ground to settle the matter. At least the parties have now had the benefit of telling their story to an independent, impartial third party. Whether or not they agree with that decision is another story, but at least it should go a long way to settle the matter, unless the relationship between the parties has become irreversible.
Another option some of my clients have agreed upon is mediation. The basic terms I include are that the parties must agree on a mediator or use the American Arbitration Association process to choose a mediator. Mediation is non-binding and allows each person to tell their side of the story and present pertinent evidence for the mediator to review. If the parties involved in the dispute are individuals, they can actually represent themselves and make their presentation to the mediator, although that is not recommended. Once the mediator renders a decision, since it is non-binding, the parties can decide to accept it, reject it in total, or agree on some middle ground to settle the matter. At least the parties have now had the benefit of telling their story to an independent, impartial third party. Whether or not they agree with that decision is another story, but at least it should go a long way to settle the matter, unless the relationship between the parties has become irreversible.
Conclusion
As you can probably see, a limited liability company formation can range from the simple to the complex. It is important to not act hastily. Make sure you get proper advice before taking the plunge, not just with limited company formation, but with starting any business venture. Proper research, planning, drafting of the operating agreement and structuring of the business will go a long way to avoid future problems and have a system in place for dealing with problems as they arise.
