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Minnesota’s New LLC Act Takes Full Effect on January 1

August 30, 2017Alerts Corporate Alert

An overhaul of Minnesota corporate law on limited liability companies, or LLCs, that was phased in over three years will take full effect in January 2018. The new act differs significantly from the old act, but is modeled after the Revised Uniform Limited Liability Company Act and is similar in many ways to LLC laws in Delaware and other states.  

Action Items Prior to January 1, 2018

Now is the time for Minnesota companies to ensure compliance. Within the next 120 days, LLCs should:

  • Confirm that your LLC is registered and in good standing with Minnesota Secretary of State (file annual reports and/or renewal, as applicable).
  • Review your LLC’s existing governing documents (i.e., any agreements between the members). Unless your LLC adopts a new operating agreement in writing, its current governing documents will continue in effect under the new act.
  • With guidance of legal and tax counsel, consider whether there may be any opportunities to update, clarify and/or amend your LLC’s existing membership agreement.

Background on the New Law

In 2014, the Minnesota Legislature enacted a new law subjecting Minnesota LLCs to the governance of Chapter 322C of the Minnesota Statutes.

Prior to 2015, Minnesota LLCs were organized under the Minnesota Limited Liability Company Act, pursuant to Chapter 322B of the Minnesota Statutes.

The new law took effect in three phases:

  1. LLCs formed after August 1, 2015, were filed under and governed by the new act.
  2. During the “conversion period” between August 1, 2015, and January 1, 2018, existing LLCs formed prior to August 1, 2015, had the option to “opt in” to the new act by amending their governing documents and filing them with the Minnesota Secretary of State under the new act.
  3. On January 1, 2018, all LLCs formed prior to August 1, 2015, will become subject to and governed by the new act. This conversion is mandatory and will occur automatically, without any action by the existing LLC.

Upon the automatic conversion to the new act, an LLC’s existing governing documents will remain in place and effective unless the members amend them, and several statutory default rules under the old act will continue to apply to existing LLCs if their governing documents are silent on these terms.

It is important to note that both the old act and the new act give freedom to LLC members to contract around many default provisions in the LLC’s operating agreement. Existing LLCs might want to take advantage of the new act transition as an opportunity to amend agreements between the members, in order to update certain membership terms and/or to take advantage of some of the changes afforded by the new act (e.g., indemnification limitations, management structures or tax provisions).

Multi-member LLCs are likely more eligible to take advantage of the changes under the new act than single-member entities, as it provides for certain structuring opportunities between various members.

Differences Between Old Act and New Act

Operating Agreement

  • LLCs under the old act typically operated pursuant to a “member control agreement.” This terminology has been removed from the statute. The new act contains statutory default rules regarding the governance of the LLC, but as with the old act, many of these default rules may be modified by the members in the operating agreement under the new act. The old act required that an LLC’s member control agreement be in writing and signed by all members of the LLC. The new act allows that an agreement may be oral, written, or implied by course of dealing.
  • What happens on January 1, 2018:
    • If an LLC under the old act does not adopt a new operating agreement before it becomes subject to the new act, its existing governing documents (articles of organization and member control agreement or other similar documents) will collectively become its operating agreement automatically.

Management

  • As noted above, the new act takes more of a partnership approach to LLC management, where the old act treated LLCs like corporations in terms of default management rules. Under the old act, an LLC was managed by either a board of governors or its members. The board-managed structure resembled that of a corporation, with the LLC’s board, members and managers possessing rights, duties and obligations mirroring those of a corporation’s board, shareholders and officers. The default provisions under the old act provided that an LLC was to be board-managed, and only individuals (not entities) were allowed to serve on an LLC’s board. Under the new act, an LLC may be managed by its members, a board of governors or one or more managers. The new act’s default rule is that an LLC is member-managed. If an LLC is manager-managed, a manager may be an individual or an entity.
  • What happens on January 1, 2018:
    • An LLC organized under the old act will retain its existing management structure when it becomes subject to the new act, unless its operating agreement is amended.

Voting and Dissenters’ Rights

  • In member-managed LLCs under the old act, the voting power of LLC members was proportional to the value of their capital contributions, unless the member control agreement provided otherwise. The new act provides equal voting rights to each member relating to the management of the LLC, unless the operating agreement provides otherwise.
  • What happens on January 1, 2018:
    • If an existing LLC’s governing agreement is silent on voting rights (meaning the default rule applies and members have voting rights in proportion to their capital contributions), the old act default rule will continue when the LLC becomes subject to the new act and members will continue to vote proportionally to their ownership stake, unless the agreement is amended to provide otherwise.
  • The old act provided dissenters’ rights to members of an LLC. In other words, a member could dissent from certain actions of an LLC (e.g., a sale of the company), and seek payment for the fair value of his/her/its membership interest. The new act does not provide these dissenters’ rights to LLC members.
  • What happens on January 1, 2018:
    • If an existing LLC’s governing agreement has not expressly eliminated default dissenters’ rights, these rights will continue to apply once the LLC becomes subject to the new act (even though the new act does not provide for them).

Indemnification Obligations

  • The old act imposes significant indemnification and funds advancement obligations, broadly mandated for all LLCs. In contrast, the new act provides greater flexibility to the members to define and/or limit the LLC’s indemnification rights and obligations.
  • What happens on January 1, 2018:
    • The indemnification obligations contained in an existing LLC’s governing agreement will continue with statutory defaults in place, unless the agreement is amended to provide otherwise in connection with the new act’s flexibility.

Distribution and Profit Rights

  • Unless an LLC’s member control agreement provided otherwise, an LLC under the old act allocated all distributions of the LLC’s cash or other assets (including those made upon termination of the LLC) in proportion to the value of each member’s contribution to the LLC, with profits and losses allocated in the same way. Under the new act, unless the members agree otherwise, distributions prior to an LLC’s termination are made in equal shares among members on a per capital basis. Upon and after an LLC’s termination, after the LLC’s liabilities have been paid, distributions of any surplus are first made to the members in amounts equaling the value of their unreturned capital contributions, with the remainder to be shared equally among members. Of course, the LLC’s operating agreement can always provide for a different arrangement than this default structure. The new act does not address the allocation of profits vs. losses, and instead allows the members to agree upon when, whether and how to allocate profits and losses as a tax matter.
  • What happens on January 1, 2018:
    • If an existing LLC’s governing agreement is silent on distribution rights (meaning the default rule applies and members have pro rata distribution rights), the old act default rule will continue when the LLC becomes subject to the new act and members will continue to receive distributions in proportion to their capital contributions, unless the agreement is amended to provide otherwise.

If you have any questions about this alert, please contact Andrea L. Ravich at 612.607.7270 or [email protected] or any member of the firm’s Corporate Department.