THE FINAL COUNTDOWN:
For over two decades, we could generally describe a Minnesota limited liability company as a business entity that is structured and governed like a corporation but taxed like a partnership. Well, the cliché that everything changes will ring true for all Minnesota limited liability companies starting on January 1, 2018.
On January 1, 1993, Minnesota adopted the Minnesota Limited Liability Company Act (“322B”). 322B governed limited liability companies organized in Minnesota. Unlike almost every other state’s LLC laws, 322B looked a lot like the Minnesota Business Corporation Act. A Minnesota LLC under 322B was governed as a corporation is governed – its members were owners of the entity (akin to a corporate shareholder); the company’s affairs were governed by a board of governors (akin to a board of directors); the board appointed executives to handle delegated duties in the day-to-day operations of the entity (an LLC chief manager akin to a corporate president); the company had an operating agreement that provided for procedural matters such as voting, meetings, notices, appointment, removal, etc. (akin to corporate bylaws); “buy-sell” restrictions were memorialized in a member control agreement (akin to the corporate shareholder agreement).
Then, effective January 1, 2015, Minnesota adopted the Minnesota Revised Uniform Limited Liability Company Act (“322C”), to be rolled out in two phases. This new statutory scheme treats new Minnesota LLCs like the majority of other states treat LLCs – like partnerships. The partnership principles present throughout 322C promote flexibility and informality with an option for a more rigid corporate structure. 322C applied to all LLCs organized on or after January 1, 2015 and to all existing LLCs that voluntarily opted in to the new 322C scheme.
If your company is still a 322B LLC, note that the next and final stage of the transition into 322C is scheduled for January 1, 2018. At that time, a savings clause will go into effect in which all LLCs still governed by 322B will automatically be subject to 322C going forward.
What Does This Mean for a 322B LLC in the Next Few Months?
322B LLCs have options:
Voluntarily Opt In to 322C. Proactively amend the Articles of Organization of the Company to provide that the Company is opting into 322C prior to January 1, 2018. Review the existing governing documents and update them to fit within the new statutory scheme of 322C, including the preparation of a new operating agreement that updates and incorporates the provisions that were previously included in the LLC’s member control agreement and operating agreement.Do Nothing. There is a savings clause in 322C, which provides that a 322B LLC will automatically be governed by 322C effective January 1, 2018, BUT the language in a 322B LLC’s Articles of Organization, any bylaws, operating agreement or member control agreement will be deemed to be included in the LLC’s operating agreement under 322C.
Our Recommendation
Our recommendation is that business owners take advantage of the fact that the LLC still has time to opt into 322C with revised governing documents that fit the new statutory scheme. Not only will this aid in a clean transition into 322C, it is the perfect opportunity to revisit that dusty record book to make sure the governing documents actually reflect the members’ current intent. Additionally, 322C provides three different options for how the LLC’s business affairs are managed – whether it be member-managed, manager-managed (yes, that is a real term right out of the statute), or board-managed and almost anything in 322C can be undone or modified by the operating agreement. Our recommendation to review and revise the existing documents is also based in large part on the dangers of doing nothing.
Dangers of Doing Nothing
There are potential pitfalls if the LLC decides to do nothing and rely on the savings clause – in which on January 1, 2018, 322B LLCs will automatically be subject to 322C going forward.
First, only a handful of the 322B provisions will still apply under the savings clause. Applying 322C provisions against an LLC created under a different statutory scheme with more default rules that could not be changed will inevitably have unintended consequences. Existing 322B documents likely contain statutory references to 322B – for example, “distributions will be made in accordance with 322B.50.” What does this mean if 322B.50 is no longer in effect? What if 322B is repealed in its entirety at some point? Does that evidence a clear intent to provide for something other than the 322C statutory default? At this point, these answers are unknown.
Second, if the records aren’t updated, alleged oral agreements amongst the business owners could be binding. 322B required that a member control agreement be in writing to be enforceable. Remarkably, 322C doesn’t require operating agreements to be agreed to in writing. Instead, oral agreements and “course of conduct” amongst the owners can establish a binding operating agreement. Resolving a dispute relating to such an oral agreement could lead to an expensive lawsuit.
Of course, all potential pitfalls cannot be known or identified. It is impossible to predict with certainty all of the risks associated with failing to act. With all that being said, if you don’t have your governing documents reviewed before January 1, 2018, all is not lost. Your LLC continues to exist and while it may be in uncharted waters, the option to amend the governing documents to bring it within 322C remains available. Don’t rest easy, though. An opportunity to sell the company or a potential dispute between owners before the update could mean expensive changes as a result of unintended ambiguities.
With Change Comes Opportunity
Avoid the ambiguity and speak with one of the attorneys at the Wayzata law firm of Sanford, Pierson, Thone & Strean, PLC. We will outline how 322C can impact voting rights, distribution rights, dissenter rights and the duties of members and will help your company explore what opportunity this mandatory change could present for your business.