In 2014, Minnesota adopted the Minnesota Revised Uniform Limited Liability Company Act (the “new LLC act”), which is set out in Chapter 322C of the Minnesota Statutes. Since August 1, 2015, new LLCs have been automatically covered by the new act. On January 1, 2018, all new and existing LLCs will be covered by the new act.
The new LLC act changes the way LLCs operate in a number of ways. Most significantly, the new LLC act shifts the default management structure of LLCs from a corporate-based model to a partnership-based model.
Under the old LLC act, set out in Chapter 322B of the Minnesota Statutes, members set out their relationship to each other and the company rules about meetings, records, and the like in a member control agreement and bylaws/operating agreement. The new LLC act eliminates the member control agreement and essentially combines them into the operating agreement. The operating agreement may also include buy-sell terms if the members do not have a stand-alone buy-sell agreement.
The mandatory adoption of the new LLC act for all LLCs on January 1, 2018 is an opportunity for business owners to review and update their LLC agreements to better reflect their actual governance practices.
Many existing LLCs may have adopted the corporate-based model under Chapter 322B, which would have dictated a board of governors, corporate officers, and annual meetings of the members. The board of governors, who may or may not be members of the company, are often empowered to determine the compensation, distribution of profits, and tax matters of the business.
However, many business owners simply do not operate that way and only make updates to the LLC records when required for banking or litigation purposes. Under the new LLC statute, the default is that members themselves make decisions by a majority vote. Still, the new LLC act does include a provision that states that the terms of existing LLC documents will be honored in an attempt to maintain the status quo. This leaves some gaps for some companies that do not update their documents as some of the default rules change.
As Chapter 322B is phased out, planners, advisors, and the courts will be more familiar with the new LLC act, operating agreements making reference to 322B may be left in the lurch. Existing member control agreements that are not updated to be consistent with the new LLC act may be particularly difficult to interpret in the future if the repealed Chapter 322B does not remain publicly available, as has happened with old LLC laws in other states that moved to the new model. Overall, the mandatory adoption of the new LLC act for all LLCs on January 1, 2018 is an opportunity for business owners to review and update their LLC agreements to better reflect their actual governance practices.
Our attorneys can help you review your member control, operating, and buy-sell agreements to ensure your documents are consistent with the new LLC act. Contact us today using our Contact Form, or schedule an appointment online to meet with an attorney.
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