Minnesota’s New Limited Liability Company Act & What it Means for Businesses
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 2013 there were 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.
Despite the popularity of the LLC, Minnesota’s laws that govern LLCs are discordant with the laws of other states governing LLCs. When Minnesota’s current LLC act was adopted, LLCs were very new and it was unclear whether they would survive as a viable business entity. Therefore, most states adopted their own unique LLC act, and Minnesota adopted its act based upon the law governing Minnesota corporations. Unfortunately, most other states chose a different model for their LLCs, and Minnesota’s LLC act is firmly in the minority.
In the past legislative session, Minnesota’s legislature adopted and the governor signed a new LLC act that will completely change how Minnesota LLCs are formed and governed. The new LLC act is based upon a model act drafted by the Uniform Law Commission, a nonprofit organization of lawyers and academics who produce numerous uniform laws to promote harmonious statutes among the states.
Perhaps the most significant change will be to the governance structure of LLCs. Currently, Minnesota’s LLC act requires that the LLC have a board of governors similar to a board of directors for a corporation and managers who oversee the day-to-day operations of the company, while members are merely passive owners of the LLC. The new act completely changes the 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 as business partners unless they choose a more complicated structure.
The LLC member control agreement has always been an important, although optional, part of Minnesota LLCs. The new act changes the name of this important agreement among the members of the company to an “operating agreement,” but the difference is more than semantic. Generally, the operating agreement 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. Where the old member control agreement was required to be in writing and signed by the members, the operating agreement can be oral or even implied. This likely means that any oral or written communication among the members is liable to fall within the definition of operating agreement and would be enforceable against the members. For example, if an entrepreneur formed an LLC under the new law and tells an acquaintance that he will become a member for providing services to the company, that person will become a member upon completing those services despite the lack of a written agreement.
The members of an LLC will also be able to limit or eliminate certain fiduciary duties otherwise required of members and managers. These fiduciary duties generally include duties of care, loyalty, and good faith and fair dealing, but LLC members will enjoy greater freedom to limit or eliminate certain of these duties in the operating agreement, and will limit judicial oversight over these limitations (and any other provision in the operating agreement) to situations where the relevant portion of the operating agreement is “manifestly unreasonable” as of the date the agreement was made.
The new LLC act will explicitly permit the creation of “shelf” LLCs, LLCs which are legally organized but which do not have members until some point in the future, as well as preformation agreements – agreements among potential members and others regarding the organization and operation of the LLC. Both of these attributes will provide greater latitude for advance planning for the use of LLCs for new businesses or in particular business transactions.
The new LLC act will become effective on August 1, 2015 and will govern all LLCs formed on or after that date, but the important question for existing LLCs is how they will impacted by the new act. Unless an LLC elects to be governed by the new act, preexisting LLCs will remain subject to the current LLC act until August 1, 2018. After that date, preexisting LLCs will be governed by the new act, except that the existing provisions of their articles of organization, bylaws, or member control agreement will be deemed to have been incorporated into the operating agreement.
So what should existing LLCs do to prepare for the new act? In the immediate future, nothing. But LLC owners should consider seeking their attorney’s advice on whether and how to take advantage of the changes coming in the new LLC act.
Pat Shriver is a corporate, transactional and IP attorney at FMJ, focusing on small to medium sized privately-held businesses. His practice includes advising clients on choice of entity, general corporate and partnership matters, commercial matters (contract drafting, review and advice), shareholder and partner relations (shareholder, partnership, and “buy/sell” agreements), securities and other corporate financing, business combination matters (including mergers, asset and stock purchases, and other similar business combinations), and intellectual property issues.