The following article is about the transition to the new Minnesota Revised Uniform Limited Liability Company Act. The old statute governing the formation, operation, and management of limited liability companies (LLCs) in Minnesota will be repealed and replaced by the new statute on January 1, 2018. The transition from 322B to 322C began on August 1 2015 when the new LLC statute went into effect. Since then, LLCs have had the opportunity to ‘opt in’ to the new Act, and starting January 1st, 2018, all LLCs will be governed by the new Act whether they have opted in or not.
If you own and operate a Minnesota LLC, this change in the law is important because it’s a fairly significant change in the rules of the game. Overall, the biggest change for existing and new LLCs is that there is much more flexibility available to owner members to decide how they want to structure their LLC, what their obligations are relative to the LLC and to each other, and to simplify the governing documents of the LLC. Under the new LLC Act, the Operating Agreement becomes the playbook where members can take advantage of this increased flexibility, set their own rules for operating their LLC, and have more confidence that their agreement will be enforceable.
Under the new LLC Act, the Operating Agreement replaces the by-laws, member control agreement, and other agreements that forced LLCs to function more like corporations. In the Operating Agreement, members can choose how the LLC will be managed whether by the members, managers, or by a board. The Operating Agreement can also designate who has authority to act on behalf of the LLC. Members can modify and eliminate certain fiduciary duties, such as duty of loyalty and duty of care, that members owe to the LLC or to other members so long as not ‘manifestly unreasonable’. The Operating Agreement can define what ‘good faith and fair dealing’ means among members, describe what transactions members may engage in without violating their duty of loyalty, and limit rights to indemnification.
An example of how this may play out would be an LLC formed by members who all own their own restaurants who come together to open a new restaurant. These members may already compete against each other in the restaurant business, share customers, and have the same suppliers. Under the new LLC Act, these members can come to an agreement on how to operate the new restaurant while continuing to compete with each other by way of their existing restaurants. In an Operating Agreement, they can address issues such as self-dealing, taking advantage of business opportunities as they arise, and other issues that may have triggered conflict and liability under the old statute. So, for example, the group can decide that it’s okay for a member to roll out their chef’s new recipe in their own restaurant without the obligation to share it with the new restaurant.
Another important aspect of the new LLC Act addresses governance and distributions. Unless the Operating Agreement states otherwise, voting and distributions are shared equally among members and not in proportion to their contributions. This is a significant departure from the old LLC Act. It’s another issue that makes the Operating Agreement much more important under the new LLC Act versus the old act. It’s important for members to reach an agreement on how votes are allocated among members and how profits and losses are shared and include these terms within their Operating Agreement.
It’s also important to note that the new LLC Act allows a court to consider communications among members in any form, whether verbal, email, or text, for example, to determine the agreements among the members. This greater flexibility in the new LLC Act in this instance could cause problems for existing and new LLCs. The most important point that I can make in this article is that the Operating Agreement becomes key under the new statute and particularly for LLCs with more than one member. At this time, owners of multiple-member LLCs should review the agreements they have in place and strongly consider putting an Operating Agreement in place.
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