Warning: if your company is a Minnesota limited liability company (“LLC”), you need to check with your attorney to determine if you need to amend your articles of organization.
Beginning on January 1, 2018, if your LLC was formed prior to August 1, 2015, your company is subject to a new law passed by the 2015 Minnesota Legislature, Chapter 322C. The law concerns how your company is managed. Generally, you company can be managed by a Board of Governors, by the managers of the company, or the owners. You will need to review your current articles of organization to determine whether your company is set up to be managed the way you want it to be managed. The law allows for a smooth transition for you to comply with the law.
Governing Agreement. 322B requires an LLC’s member control agreement to be in writing and signed by all of the members of the LLC and persons who are in the process of becoming members. Under 322C, an agreement among the LLC’s members, regardless of what is it called, may be oral, written, implied by a course of dealing, or a combination thereof. If a 322B LLC does not adopt a new agreement when it becomes subject to 322C, its existing articles of organization, bylaws/operating agreement, and/or member control or limited liability company agreement will collectively become its operating agreement. Under both 322B and 322C, many statutory default rules may be modified in either a member control agreement or operating agreement, as applicable. Keep reading to find out what you need to be aware of.
Management Structure. Under 322B, an LLC may be managed by a board of governors or its members. The board-managed structure resembles that of a corporation, with members, the board, and managers whose duties and obligations resemble those of shareholders, a board, and officers in a corporation. The default structure under 322B is board-managed, and board members must be individuals. Under 322C, 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 322C is member-managed. The governing structure of a 322B LLC that becomes subject to 322C will remain the same as it was under 322B unless its operating agreement is amended.
Default Voting Rights in Member-Managed LLCs. Under 322B the voting power of LLC members is proportional to the value of their capital contributions unless the member control agreement provides otherwise. Under 322C each member has equal voting rights in the management and conduct of the activities of the LLC, unless the LLC’s operating agreement provides otherwise. If a 322B LLC has no agreement addressing voting rights and the default rule applies (meaning voting rights in proportion to contributions), those default rights will continue when the LLC becomes subject to 322C unless they are changed in the operating agreement.
Default Distribution and Profit Rights. Under 322B, unless a member control agreement provides otherwise, distributions of cash or other assets of an LLC, including distributions made upon termination of an LLC, are to be allocated in proportion to the value of each member’s contribution to the LLC. Profits and losses are to be allocated the same way.
Under new 322C, unless the operating agreement provides otherwise, distributions prior to termination of an LLC are to be made on a “per capita” basis, or in equal shares among members. Upon termination of an LLC, the distribution of any surplus remaining after the LLC’s liabilities have been satisfied is made in specified order: first to members in an amount equal to the value of their unreturned contributions, and then equally among members. 322C does not address the allocation of profits and losses among members, viewing this primarily as a tax matter and instead leaving to the members the decision as to whether, when, and how to allocate profits and losses, to be expressed through their operating agreement.
If a 322B LLC’s distribution rights are set by the 322B default rule described above, those default rule rights will continue when the LLC becomes subject to 322C unless they are changed in the operating agreement.
Dissenters’ Rights. 322B provides dissenters’ rights (i.e., a member’s right to dissent from and obtain payment for the fair value of his, her, or its interests upon the occurrence of certain LLC actions.) 322C does not provide dissenters’ rights. However, if a 322B LLC has not otherwise eliminated statutory dissenters’ rights in its governing documents, dissenters’ rights will continue to apply once the LLC becomes governed by 322C.
Statutory Apparent Authority. 322B provides that a 322B LLC must have one or more individuals acting as Chief Manager and Treasurer, and, unless the member control agreement provides otherwise, the Chief Manager is the only person who can act as an agent of the LLC. Under 322C, the ability of a member, or anyone else, to act as an agent of the LLC is to be addressed, if at all, in an operating agreement. An LLC may file statements of authority with the Office of Minnesota Secretary of State (similar to those filed by partnerships) with respect to non-members.
Fiduciary Duties. Both 322B and 322C impose certain fiduciary duties on members, managers, and governors, including the duties of loyalty and care, and permit certain aspects of those duties to be limited in a member control agreement or operating agreement, as applicable. However, 322C permits the duty of loyalty, in particular, to be more widely modified than does 322B.
Indemnification Obligations. 322B provides extensive, mandatory indemnification and advancement obligations that apply to all 322B LLCs. Chapter 322C provides greater flexibility to define or limit indemnification rights and obligations.
What should you, as a owner of a LLC, do prior to January 1, 2018:
You should make sure your LLC is registered and in good standing with the Office of Minnesota Secretary of State. If your LLC has been administratively dissolved, you can reinstate its existence by completing an annual renewal and paying the applicable fee.
You should also undertake a full review of your LLC’s existing governing documents, including your articles of organization, bylaws, member control or limited liability company agreement, and any other agreements that may exist among the members of your LLC. Remember, unless the members of an LLC adopt a new operating agreement in writing, under 322C, the LLC’s existing 322B documents will become the operating agreement.
An LLC’s members may want to consider whether the coming effectiveness of 322C may provide any opportunities to clarify and update provisions of their existing documents that may have become outdated. For example, totally apart from the 322B to 322C changeover, Congress has enacted new rules for audits of partnerships that will take effect for partnership tax years beginning on or after January 1, 2018. Many LLCs are taxed as partnerships, with agreements that contain tax provisions designed for the old “TEFRA rules”, with a “tax matters partner” and no possibility of the LLC having additional tax liability as a result of an audit. The new rules replace the “tax matters partner” with a “Partnership Representative,” who need not be a member/partner, and also create real risk that the LLC could have direct tax liability for issues from prior years.
The bottom line is that you may want to meet with an attorney to discuss ways in which new 322C may specifically impact your LLC’s governance and operation and whether there are any changes that should be made to your existing documents.
Note: The information above is from a Memorandum drafted by the Partnerships and Limited Liability Companies Committee of the Minnesota State Bar Association Business Law Section, regarding the impact of Chapter 322C on limited liability companies currently operating under Chapter 322B, dated June 23, 2017.