LLCs Must Prepare Now for Significant MN Rules Change

Bill Gschwind and clientAll Limited Liability Companies (LLCs) established before August 1, 2015, will be subject to a new Minnesota LLC law effective next January that will affect voting rights, financial distributions and duties.

The MN Secretary of State’s office is urging each affected company to have its attorney review the firm’s articles of organization, bylaws and member control agreements this year to ensure they will continue to align with their intentions after the new statute takes effect.

Minnesota LLCs shifting from corporate to partnership model

The Legislature passed the MN Revised Uniform LLC Act (MN Statute Chapter 322C) in 2014 but grandfathered companies formed before August 2015 under the old Chapter 322B statute until next year. The new law will treat LLC more like partnerships than corporations and give the principals more flexibility. However, the default provisions that apply in the absence of new written agreements could unknowingly alter a business’s operating rules in many significant ways.

Most important, understandings need not be in writing to impact court decisions. Oral statements and common practices also can be cited in the absence of written provisions. As such, the only way to have clear and predictable governance is for the business to work with its attorney to establish comprehensive written rules between now and Dec. 31, 2017.

LLC governance "default" is equal vote and distribution

MN Statute 322C puts the power of the company in the members (vs. the governing board), who have equal voting power and distribution rights regardless of their individual contributions and investments unless otherwise agreed. However, the company is able to limit duties of loyalty, care and fiduciary responsibility providing that those provisions are not “manifestly unreasonable.”

The new law could impact who is liable for prior year taxes and how proceeds are divided if the company is sold. Minnesota Construction Law Services encourages its clients to schedule consultations this summer to ensure that their governance documents are in order for the Jan. 1, 2018 changeover.

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