Upcoming Changes to Minnesota Law Affecting Limited Liability Companies Organized in Minnesota
Effective January 1, 2018, all active limited liability companies (“LLCs”) that were organized in Minnesota on or before August 1, 2015 will no longer be subject to and governed by the Minnesota Limited Liability Company Act, Minnesota Statutes, Chapter 322B (“322B”), but will become subject to and governed by the Minnesota Revised Uniform Limited Liability Company Act, Minnesota Statutes, Chapter 322C (“322C”). This is a mandatory change and will take effect on January 1, 2018 without any action by the LLC.
This memorandum provides next steps for LLCs and summarizes the primary differences between 322B and 322C. This memorandum does not constitute legal advice, and any legal questions you have should be discussed with an attorney.
- Confirm that your LLC is in good standing with the Minnesota Secretary of State. If not, you can typically reinstate it online by completing the proper form and paying the applicable fee.
- Review with all members (owners), current members of the Board of Governors, and any managers (officers) of the LLC all existing organizational documents, including Articles of Organization, Bylaws, Member Control Agreement, and buy-sell agreements, and note any areas which may require changes or updates to reflect how the parties envision the LLC to operate or that may be incorrect or outdated.
- Contact the Larkin Hoffman Corporate Department or your attorney and your accountant/tax preparer to discuss how 322C may specifically impact your LLC’s governance and operation and whether there are any changes that should be made to the LLC’s existing organizational documents.
- Amend the LLC’s existing organizational documents if required.
Primary Differences Between 322B and 322C
LLCs under 322B must have Articles of Organization filed with the Minnesota Secretary of State and may have Bylaws, a Member Control Agreement, and/or buy-sell agreement. Under 322C, there are no significant changes that must be made to the LLC’s Articles of Organization in most cases, but an “Operating 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. This can be risky as 322C permits an Operating Agreement to be oral. On January 1, 2018, the 322B LLC’s existing Articles of Organization, Bylaws, Member Control Agreement, and/or buy-sell agreement will collectively become the Operating Agreement under 322C unless a new Operating Agreement is adopted to replace these existing organizational documents. Under both 322B and 322C, many statutory default rules may be modified in either a Member Control Agreement or Operating Agreement, as applicable.
The default rules of 322B provided for a corporate model of management, with the members (owners) electing a Board of Governors who manage the LLC, and who appoint managers (officers) such as a Chief Manager, Treasurer, and Secretary, with specific authority for various tasks. Governors must be individuals. If the Member Control Agreement provides, the LLC could be managed by the members.
Under 322C, the LLC by default is managed by its members, unless the Operating Agreement provides for management by a Board of Governors or by managers. The management structures available under 322C are:
• Member-Managed: Members manage the LLC. There are no Board of Governors, managers, or officers.
• Board-Managed: Members elect a Board of Governors who manage the LLC, and who may appoint officers such as a President, Treasurer, and Secretary, with specific authority for various tasks. Governors must be natural persons.
• Manager-Managed: Members appoint managers (not officers), and each manager has equal say in managing the LLC. Managers may be entities. There is no Board of Governors and no officers.
The management 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.
Under 322B, members vote in proportion to the value of their capital contributions unless the Member Control Agreement provides otherwise (such as in proportion to the number of membership units or membership interests held by the member, which may not line up with the value of their capital contributions). Under 322C, each member has equal voting rights in the management and conduct of the activities of the LLC (i.e., per capita), unless the Operating Agreement provides otherwise. If a 322B LLC has no agreement addressing voting rights, and therefore the default rule applies (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. However, in many cases, you may desire to have members with unequal ownership and voting rights.
Distributions and Profits and Losses
Under 322B, unless a Member Control Agreement provides otherwise, distributions, including distributions made upon termination of an LLC, and profits and losses are to be allocated in proportion to the value of each member’s capital contributions to the LLC.
Under 322C, unless the Operating Agreement provides otherwise, distributions prior to termination of an LLC are to be made on a “per capita” basis (meaning equally among members, regardless of their ownership or capital contributions). Upon termination of an LLC, the distribution of any surplus remaining after the LLC’s liabilities have been satisfied is made in a 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.
If a 322B LLC’s distribution rights are set by the 322B default rule above (distributions in proportion to value of capital contributions), those default rule rights will continue when the LLC becomes subject to 322C unless they are changed in the Operating Agreement.
322B provides dissenters’ rights, granting a member the right to dissent from and obtain payment for the fair value of his, her, or its membership units or membership interests upon the occurrence of certain LLC actions. 322C does not provide dissenters’ rights. However, if a 322B LLC has not eliminated statutory dissenters’ rights in its existing organizational documents, dissenters’ rights will continue to apply once the LLC becomes governed by 322C unless they are waived in the Operating Agreement.
Should your LLC update or revise its existing organizational documents to conform to 322C, or can it just continue with its existing organizational documents which, by operation of law, will become the Operating Agreement under 322C? The answer depends on the language in the existing organizational documents and the structure and operation of the LLC. Consider the following:
• Are any provisions in the existing organizational documents incorrect or outdated? For example, does the current voting or management practice of the LLC actually deviate from what is written in the existing organizational documents? If so, now may be a good time to correct the existing organizational documents, and to do so under 322C.
• Do any provisions in the existing organizational documents require updates, beyond those required by 322C? For example, the IRS has new rules for audits of partnerships that will take effect for partnership tax years beginning on or after January 1, 2018. These rules will supersede any corresponding provisions in a current Member Control Agreement. Most LLCs with two or more members are taxed as partnerships, with 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.
• Should the LLC take advantage of some new provisions in 322C based on the current ownership of the LLC? For example, if the 322B LLC’s existing distribution rights are not set out in the existing organizational documents, then the 322B default rule above (distributions in proportion to value of capital contributions) will apply, and those default rule rights will continue when the LLC becomes subject to 322C unless they are changed in the Operating Agreement (to, for instance, distributions in proportion to ownership). If the existing organizational documents do not waive dissenters’ rights, then the statutory dissenters’ rights provided for under 322B will continue to apply under 322C unless the Operating Agreement is changed.
You should contact your Larkin Hoffman attorney and/or your accountant/tax preparer to discuss how 322C may specifically impact your LLC’s governance and operation and whether there are any changes that should be made to your existing organizational documents.
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