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Change is Good: Applause for the (Almost) New Connecticut LLC Act Part One

Posted April 9, 2016
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Connecticut is closer to adopting the Uniform Limited Liability Act, and that's good news.  You can follow the bill (HD 5259) here.  Connecticut's current LLC act has not undergone significant change since 1993, and change is good.  A limited liability company is the choice du jour for small businesses in Connecticut.  In fact, there are 7 times more new LLCs in Connecticut than corporations.  So it's a good thing Connecticut will likely be joining the 9 other states that have adopted the most recent version of the Uniform Law. There are many positive changes on the horizon for members that believe they are being frozen out, or oppressed by another member.  New Jersey has had similar protections for some time now, as a former colleague of mine wrote about in 2013 here. One particular change may help when there are two equal members of an LLC, because under the new Act a member can be expelled by court order if the member is engaging in wrongful conduct, willfully violating the operating agreement or breaching his fiduciary duty.

Litigation often arises between members of LLCs that don't get along.  One member might be taking excessive distributions, or downright stealing from the LLC.  Litigation over these issues is costly, and really never a good problem-solver. Under the current law, the harmed member has to petition the Court and typically seek dissolution of the LLC (even the word "dis-solution" tells you its not a solution to the problem). The innocent member is held hostage by the Hobson's choice of putting up with the conduct or closing down the LLC altogether.  With the new law, the threat of expulsion can either force the offending member to change his ways, or the Court can force the member out completely.  The threat of expulsion could also lead to a buyout, or even a change in ownership structure so the offending member has less control over the LLC.

Members of closely-held LLCs should breathe a sigh of relief when the new law passes because it will really change the landscape for members who are doing the right thing by the LLC but are faced with a partner who isn't.

 

About the Author

Business Litigation Attorney Anthony Minchella

Tony represents Fortune 50 financial services companies, retail giants, and small and large specialty products companies in employment litigation, trade secret and non-competition litigation, and unfair trade practice issues. When acting as local counsel, Tony, an adjunct professor of law on Connecticut Civil Procedure at Quinnipiac Law School, helps lead counsel navigate the nuances of Connecticut state and federal court practice. Tony graduated magna cum laude from Quinnipiac University School of Law. He passed the New Jersey, New York and Connecticut bar exams and then moved on to careers with large and small firms which led to his boutique litigation practice.