Many small and medium-sized business owners may not be aware, but as of January 1, 2018, Minnesota changed its laws governing various aspects of business operations for limited liability companies (LLCs) in Minnesota (formerly Chapter 322B, now 322C). The changes have been on the books for some time, and received some heightened coverage late last year, but many may still be unfamiliar with the new laws. Minnesota largely enacted the new system to bring the State more in line with the majority approach in the US. Depending on how your business is organized, this change may have either minimal or significant effects, and some changes may have occurred automatically. This post addresses a few of the more notable changes, but it is not comprehensive and is no substitute for having an attorney review your own business structure and formation documents.
In the old system, by default a board of governors managed an LLC. This could be changed if specified in the formation documents. Board-managed structure is similar to the typical system of governance in a corporation. Under the new laws, an LLC may be managed by a board of governors, its members, or one or more managers. In a manager-managed structure, the manager may be either an individual or entity. The default structure under the new 322C system is member-managed, making it operate more as a partnership by default. This will, in theory, remove an additional layer of governance and thus simplify operations. This change in default structure was not automatic for existing LLCs. If you were already organized before January 1, 2018 and had a written agreement on this issue, your existing governance structure remains in place.
Previously, an LLC’s member control agreement must have been in writing and signed by all of the members of the LLC and all persons who are in the process of becoming members. Under 322C, an agreement among the LLC’s members, now generally referred to as an “operating agreement,” may be oral, written, implied by conduct, or created through any combination of those processes. An LLC’s existing articles of organization, bylaws, operating agreement, and/or member control or limited liability company agreement collectively became its “operating agreement” as of January 1, 2018. Under the new laws, as was the case under the old system, an LLC may modify many of the details in either a member control agreement or operating agreement, as applicable, and formal agreements are often optional.
Previously, a member’s vote was by default proportional to the value of their capital contributions, unless stated otherwise in a member control agreement. Now, the default rule is that each member has equal voting rights unless the LLC’s operating agreement provides otherwise. This change in default structure was not automatic for existing LLCs. If you were already organized before January 1, 2018 and had a written agreement, your existing governance structure remains in place.
322C does not provide dissenters’ rights as were specified under 322B, but dissenters’ rights in any existing operating agreement continue to apply unless or until changed.
In the old system, by default, distributions of cash or other assets of an LLC were allocated in proportion to the value of each member’s contribution to the LLC. Now, distributions during normal operations are made in equal shares among all members, unless stated otherwise in an operating agreement. Upon termination, surplus distributions available after satisfying the LLC’s liabilities go first to members, to reimburse their unreturned contributions, and then are distributed equally among members. This change in default structure also was not automatic for existing LLCs. If you were already organized on January 1, 2018 and had a written agreement, the existing provisions remains in place.
Increased Flexibility in Other Operational Terms.
Fiduciary duties of members, managers, and governors largely continue, and can still be modified in similar ways as before. The new law expands somewhat an LLC’s ability, through an operating agreement, to modify the duty of loyalty and related responsibilities. The new law similarly expands some indemnification rights and obligations.
The new system under 322C effectively eliminates apparent statutory authority and leaves it to the LLC to authorize agents to bind the LLC, through the terms of the operating agreement. The new law states that a member is not an agent of an LLC simply because they are a member of the LLC. The LLC can file Statements of Authority with the Secretary of State. These can establish or constrain the authority of interested persons within the LLC to bind the LLC. The prior system did not contain an equivalent mechanism by which an LLC could identify its agents and specify their authority to act.
The State was certainly aware that radical, automatic changes to existing law could be catastrophic for certain business and even unnecessarily create disputes between members. For that reason, most of the more significant changes are not automatic, but allowed you to “grandfather in” your existing arrangements. However, these changes to the law could impact you in many ways, and the only real way to know is to have an attorney familiar with the changes review your business structure and your operating and formation documents. Contact Wilson Law Group to schedule a consultation if you would like to know more about how these changes, and others, could affect your business operations or your interest in your company.