Minnesota first adopted laws establishing limited liability companies (LLCs) as a new form of business entity in 1992. LLCs have been wildly popular ever since; in recent years, there have been approximately five new Minnesota LLCs formed for every new corporation. The combination of limited liability for owners and the avoidance of entity-level taxation is definitely a winner with Minnesota’s business community.
In 2015, Minnesota adopted a New LLC Act (“New Act”) that has completely changed how Minnesota LLCs are formed and governed. On January 1, 2018, the New Act started to govern not only new LLCs, but all existing LLCs formed under Minnesota’s Old LLC Act (“Old Act”). With almost a year of the New Act under our belt, we thought it was important to revisit the changes to see what has made the most impact on businesses.
One of the most significant changes to affect LLCs is the governance structure. Under the Old Act, Minnesota LLCs had a board of governors (similar to a board of directors for a corporation), managers who oversee the day-to-day operations of the company, and members who are merely passive owners of the LLC. The New Act completely changes this structure, with the default rule being that Minnesota LLCs will be managed by its members. This change permits LLCs to avoid multiple layers of governance and will let LLC members operate more like business partners unless they choose a more complicated structure.
The New Act makes the operating agreement critically important for the LLC and its members. The operating agreement is the agreement among the members of the LLC which covers any aspect of the relations among the LLC members and the company, the rights and duties of persons acting as managers of the company, and the activities and conduct of the company. Under the New Act, there is virtually no limitation to how the members may agree to govern the company. It may be particularly important to the members to change certain “default” rules under the New Act, including the default rules that members are entitled to one vote per member regardless of their financial interest in the company.
Entering into an operating agreement under the New Act is a little easier, but also trickier, than under the Old Act. Under the Old Act, the agreement was required to be in writing and signed by the members. However, under the New Act, the operating agreement can be a formal written agreement, but may also be oral or even implied. While there is no indication as to what this specifically means, it likely means that any oral or written communication among the members is liable to fall within the definition of the operating agreement and would be enforceable against the members. Since oral and implied operating agreements are now fair game under the New Act, we cannot stress how important is it to have a clear, written understanding of how the company will operate and how the members will relate to each other and the company.
The New Act also differs from the Old Act in less apparent but still important ways. The New Act:
- Permits members to restrict or eliminate fiduciary duties
- Changes the nature and nomenclature of the membership interest
- Can limit the ability of an LLC to expel a member (even for cause)
- Introduces the concept of “oppressive conduct” as a cause of action between members in place of the older “breach of fiduciary duty” standard.
Because the New Act includes changes in the law that may not be anticipated by business owners, it may make sense to have your attorney advise you on the changes in the law affecting LLCs. You may also want to take the opportunity to review a dated member control agreement or operating agreement to determine whether any changes should be made in light of the change in the law. Fafinski Mark and Johnson has tremendous experience with Minnesota LLCs and can help with these or any other needs regarding LLCs.
This article was written by Corporate attorney Ernest (Pat) Shriver – if you have any questions about Minnesota’s New LLC Act and how it could affect your business, he can be reached at pat.shriver@fmjlaw.com or 952-995-9500.
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