Beginning January 1, 2018, all limited liability companies (“LLCs”) formed in Minnesota before August 1, 2015 under Chapter 322B will become subject to a new LLC law passed by the 2015 Minnesota Legislature, Chapter 322C.
What’s the difference between the new law and the old one?
There are significant differences between Chapter 322C and the prior Chapter 322B. Generally, the prior law was fashioned after Minnesota’s corporate statutes. The new law is intended to provide flexible procedures and governance more like a partnership. Most other states never adopted the old Minnesota corporate style approach to LLCs instead choosing a more partnership style of statute. As a result, Minnesota’s new law brings it more in line with the laws of most other states. Therefore, lawyers outside of Minnesota should now be more comfortable administering and forming Minnesota LLCs. However, the dissenter’s rights in the old law remain in the new law.
How does management of the companies change under the new law?
Under the old law, very similar to a corporation, each Minnesota LLC usually operated with a Board of Governors, issued units for ownership and proportional voting purposes, and worked under detailed articles, bylaws and sometimes member control agreements. Under the new law, one agreement will contain most if not all of those type of provisions. The negotiated Operating Agreement will address governance, relations among the members as well as relations between the members and the LLC.
Among other provisions, the new law provides several critical changes. Without an Operating Agreement providing otherwise, an LLC will be member-managed with all members enjoying equal rights in the management and conduct of the LLC’s activities regardless of capital contribution. A majority of the members (as opposed to a majority of the ownership) will resolve disputes in the ordinary course of the activities of the company. An act outside the ordinary course may be undertaken only with the consent of all members. Such a default arrangement may be unpalatable to most LLCs except those with members each having equal capital contributions or those with only one member.
The new law provides flexibility.
The good news is that the new law is flexible. Members may negotiate an agreement retaining member management, adopting manager management or adopting board management. In addition, much like a partnership, the members may negotiate disproportionate rights to distributions or proportional (as opposed to per capita) voting. With some exceptions, the new law’s default provisions, governing LLCs without an Operating Agreement, can only be modified by member consent in an Operating Agreement. However, the new law is so flexible that an “operating agreement” is not limited to a single formal written document, unless the members so agree (which they should). A new “operating agreement” can be oral, implied by members’ actions, contained in document, or cobbled together with all three. However, if properly done, many of the provisions agreed to by the members under the old law can be retained under the new law. Of course, there are many other important differences between the new law and old law not addressed in this article. Those include changes in indemnification rights and conflicts of interest, among others. These issues, along with the others mentioned here, are very important to your company.
Revisit your existing documents now to assure they work as you want them to.
We suggest revisiting your existing LLC governance, organizational and operational documents in light of the new law. The attorneys below are available to assist you.