When the Connecticut Legislature approved the Connecticut Uniform Limited Liability Company Act at 11:58 p.m. on May 5, 2016 (the final day of the 2016 Connecticut Legislative Session) and the Governor signed it into law on May 12, 2016 (“CULLCA” attached), Connecticut implemented its first major revision to its LLC law since its introduction on October 1, 1993 (the “Old Act”). CULLCA, along with the technical corrections approved in the 2017 Legislative Session (attached) became effective in Connecticut on July 1, 2017. CULLCA was drafted by the CBA Business Section in collaboration with the Uniform Laws Commission and represents the culmination of this collaboration.
When the Old Act was implemented, the LLC was a relatively new form of business entity. Since then the business landscape and the use and structuring of LLCs have changed dramatically. In 1977, Wyoming was the first state to implement an LLC law. The IRS did not officially recognize the LLCs until 1988 when it issued Revenue Ruling 88-76. With the issuance of Revenue Ruling 88-76, the IRS required that in order to obtain the flow-thru taxation of a partnership while also receiving the limited liability of a corporation, LLCs could not have more than 2 out of the 4 corporate characteristics identified in this Revenue Ruling. These were defined as: 1) Centralization of Management; 2) Free Transferability of interests; 3) Continuity of Life; and, 4) Limited Liability.
Single member LLCs were not recognized by the IRS as yet (even though the Texas LLC Act did and the New York LLC Act enacted in 1994 did as well). In contrast, currently, there are 7 times as many LLCs formed annually in Connecticut than corporations. The Connecticut Entity Transaction Act (“CETA”) had not been contemplated, let alone introduced at that time. There was very little case law which meant attorneys were concerned whether the intended limited liability protection anticipated would even be upheld.
In revising the Old Act, the Business Section’s goals were to: 1) Pattern the new LLC law after the Revised Uniform LLC Act to provide uniformity in the interpretation of its statutory provisions and to provide more legal precedent for interpreting the new LLC law; 2) “Connecticutize” the Revised Uniform LLC Act to keep the best characteristics of the Old Law and to provide greater ease in the transitioning to the new law; and, 3) Create a more business-friendly legal environment in order to encourage LLCs to be formed in Connecticut under Connecticut law and foreign LLCs to be comfortable doing business in Connecticut. As the Co-Chair of the Business Section’s LLC Committee testified to the Connecticut Legislature: The result “is [a] more comprehensive, well-written and modern [law] than our Current Act” (February 29, 2016 Testimony of Marcel J. Bernier, CBA Business Law Section, Co-Chair of the LLC Committee to the Connecticut Judiciary Committee). This article briefly highlights a number of notable differences between CULLCA and the Old Act.
It is important to note that pursuant to C.G.S. Section 34-283(d), although CULLCA supersedes the Old Act, neither CULLCA nor any amendments to it shall be construed to impair the obligations of any contract existing on, or affect any action or proceedings begun or right accrued before July 1, 2017, or the effective date of such amendment.” For LLCs formed prior to July 1, 2017, the articles of organizations will be deemed to be certificates of organizations and will not have to be amended.
CULLCA’s drafters recognized that since many LLCs are not formed by lawyers, certain protections were probably not addressed in LLC operating agreements (written or otherwise). Therefore, the Business Section drafted CULLCA to be tailored for the unsophisticated business owner. As with the Old Law, CULLCA does not require the LLC operating agreement to be in writing. It further extends this informality by permitting that operating agreements may now be implied as well. Where issues are not addressed in the operating agreement, CULLCA, like the Old Law, provides default rules that will be applied. CULLCA’s default rules are consistent with the default provisions under the Old Law with 2 exceptions. First, unlike under the Old Law, the default provision for the admission of a new member to the LLC has been changed from a majority in interest to a unanimous vote. Second, the vote to amend the operating agreement has been changed to a unanimous vote of the members. As in the Old Act, the default provision for the vote to dissolve an LLC is a majority in interest.
Although it is probably unnecessary for written multi-member operating agreements drafted under the Old Law to be revised, attorneys and business owners should be cognizant of these default rule changes. If the voting requirements for the addition of new members and/or the voting requirements for amending the operating agreement were not addressed in the existing operating agreement, they should be examined with your clients now. Where operating agreements formed under the Old Law, written or unwritten, that failed to address these voting issues, they should now be addressed.
CULLCA seeks “to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability agreements.” (C.G.S. Section 34-283d (a)). This is consistent with the Old Law. With the exception of the 14 items specifically set forth in C.G.S. Section 34-243d(c), an LLC’s operating agreement may contain any provision approved by its members. If there are any inconsistencies between an LLC’s certificate of organization and its operating agreement, the terms of the operating agreement will control. Additionally, CULLCA eliminates the statutory apparent authority of a member of a member-managed LLC to act as agents of the LLC. Instead, the authority to bind the LLC is derived from the operating agreement. This is consistent with the intended freedom of contract principle that the Business Section sought.
Also new under CULLCA, is the requirement that LLCs that perform professional services will now need to use PLLC or P.L.L.C. in their names (professional services LLCs formed prior to July 1, 2017 will not be required to change their names or amend their formation documents). The new provisions mirror those of the Connecticut Professional Service Corporations.
CULLCA prohibits distributions to members and managers if the LLC is insolvent. Similar to the Connecticut Business Corporation Act, it imposes personal liability on a member or manager who consents to such distributions.
Like an “economic interest” in the Old Act, CULLCA defines a “transferable interest” as the right of the transferee to only receive the economic rights of the transferor. To become a member with full membership rights under CULLCA, the transfer must be approved by the vote of the remaining members as set forth in the operating agreement.
Similarly, CULLCA formalizes that charging orders are a judgment creditor’s sole remedy against single member LLC judgment debtors. Although it was assumed under the Old Law that judgment creditors could only receive judgment in the amount of the single member’s distributions in enforcing their claims and not be permitted to either to step into their shoes or force a foreclosure, this was called into question by a Florida Supreme Court decision in 2010. In Olmstead, et al. v. FTC, 44 So. 3d 76 (2010), the Florida Supreme Court held that a judgment creditor could in fact foreclose on a member judgment debtor’s membership interest. This decision raised the issue of whether Connecticut courts would recognize charging orders going forward. Delaware amended its charging order statute to ensure that it also extended to single member LLCs. With the enactment of CULLCA, Connecticut formally provides this protection as well. This is another example of how CULLCA is more business-friendly than the Old Law.
Like the Old Law, CULLCA permits the merger and exchange of interests between different types of entities. These transactions are governed by CETA. Unless addressed in the operating agreement, the default provision for the voting requirement for these transactions will be a simple majority in interest. Since CETA is relatively new in Connecticut, attorneys may want to review their clients’ operating agreements to examine if these transactions are addressed and if not, whether your clients would prefer a super majority vote in these cases. CULLCA also permits the merger of foreign and domestic LLCs.
CULLCA also allows direct actions by members against other members, managers, and the LLC and derivative actions by members as set for in C.G.S. Sections 34-271, 34-271a, 34-271b, 34-271c, 34-271d, and 34-27l e. The derivative action provisions under CULLCA are consistent with the derivative action provisions of the Connecticut Business Corporation Act.
In addition, there are minor technical changes that attorneys must be aware of under CULLCA. First, certain terminology has changed from the Old Act. The following non-exhaustive list are changes in terminology that you should be aware of:
CLLCA Terminology CULLCA Terminology
- Articles of Organization Certificate of Organization
- Statutory Agent for Service Registered Agent
- Articles of Merger Certificate of Merger
Second, CULLCA eliminates the requirement that the organizational document (the Certificate of Organization) state whether the LLC will be member-managed or manager-managed. CULLCA requires instead that management of the LLC be set forth in the operating agreement. Additionally, the purpose clause required under the Old Act in the Articles of Organization has been eliminated as a requirement in the new Certificate of Organization.
Third, certain records required to be kept by the LLC under the Old Act are no longer required and an Organizer’s Statement no longer needs to be prepared and kept by the LLC.
In light of the changes CULLCA brings to the Old Act, some of which are highlighted in this article, there is an opportunity for businesses to become aware of the default rules and review and perhaps revisit their operating agreements in light of those rules. The arrival of CULLCA provides opportunities for businesses to operate in a more business-friendly environment.