Set to take effect at the start of 2018, Minnesota’s Revised Uniform Limited Liability Act (the Revised Act) contains traps that you may want to be wary of. Seeking an experienced business lawyer could be the right course of action to take. CPAs should familiarize themselves with the Revised Act and what it could mean for both existing and newly formed LLCs.
About the Act
In 2015, the Minnesota Legislature adopted a version of the Uniform Revised Limited Liability Company Act to replace the old act. The changes have many implications for new and existing LLCs.
- The old act will be repealed on January 1, 2018. This means that all LLCs that were organized under the old act automatically become subject to the Revised Act on that date (joining LLCs that were organized after August 1, 2015, as well as those that have already opted in).
- Some rights under the old act are preserved for LLCs that convert to Revised Act LLCs on January 1, 2018, including “dissenter’s rights, company obligation to maintain certain records relating to contributions, and various voting and profit/loss allocation and profit distribution rules. Additionally, existing articles, bylaws, operating agreements and member-control agreements largely remain in place. “
- The old act provides that “(t)he business and affairs of a limited liability company is to be managed by or under the direction of a board of governors,” and requires at least two manager positions. By contrast, the Revised Act establishes three alternative governance structures for an LLC: member-managed, manager-managed or board-managed.
On Operating Agreements
- The Revised Act anticipates that members will negotiate operating agreement terms. Because the corresponding rules in the Revised Act are less specifically worded than the old, a newly formed LLC without an operating agreement could be left with no rule at all on particular matters of importance, or a rule that is inconsistent with previous understandings.
- Under the Revised Act, an LLC’s operating agreement consists of all agreements, written and oral, between the members, including those formed by emails and conversations. This means that members should be sure to document their agreements.
- “New LLCs that organize under the Revised Act are subject to rules that some members will find objectionable. For example, an LLC without an operating agreement is, by default, “member managed,” and all members have an equal vote and share equally in distributions, regardless of the amount of capital they have contributed.”
For these reasons and more, it is unwise for clients to borrow an operating agreement from another business or for them to use an online form. Furthermore, there are no reported Minnesota court decisions to help us interpret the Revised Act; consequently, there is significant debate about what many of these terms and provisions mean.
For more specific recommendations on how LLCs should adapt to the Revised Act, see the following post on this topic, located here: [What you don’t know about Minnesota’s Revised LLC Act].
Note: This post has been adapted from a contribution to the August issue of Footnote, a publication of the Minnesota Society of Certified Public Accountants, MNCPA. The original authors are Janel Dressen, Wally Hilke and Vince Louwagie.