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The Minnesota Revised LLC Act

By

The Who, When, and What of Ensuring Your Company is Compliant

In April 2014, Minnesota joined several other states in adopting a version of the Uniform Revised Limited Liability Company Act (the “Revised Act”).  The Revised Act, although not fundamentally altering the nature of Minnesota LLCs, represents a substantial overhaul to the contractual arrangements, governance, and standards of conduct for Minnesota LLCs.  For this reason, Minnesota business owners should take note and revisit their LLC’s core legal documents to avoid any potential pitfalls and traps for the unwary caused by the Revised Act.

This article is intended to provide a short, need-to-know primer for Minnesota business owners.  It explains the Who, When, and What to ensure your company is in compliance with the Revised Act.

  1. Who.  Which companies are affected by the Revised Act?

The Revised Act applies to all Minnesota LLCs, regardless of size.  It does not directly impact corporations, partnerships, or non-Minnesota entities.

Compliance with the Revised Act is especially important for multi-member LLCs (i.e., companies with more than one owner).  As explained below, the Revised Act modifies several of the statutory presumptions for voting rights and governance of the LLC.  It is unlikely that the legal documents associated with pre-existing LLCs (formed prior to August 1, 2015) take these changes into account.  This could be problematic unless the LLC updates its organizational documents to reflect the statutory changes.  If (as detailed below) your Minnesota LLC has more than one member, chances are that at least some modifications will be necessary.   

The need to update is less urgent for single-member LLCs.  While the Revised Act applies equally to all Minnesota LLCs, companies with only one owner probably do not have to worry about voting rights, governance structures, or similar issues addressed by the Revised Act that uniquely impact multi-owner organizations.  Nonetheless, even single-member Minnesota LLCs should consider updating their legal documents to comply with the new statute, particularly those that may take on new members or seek additional financing in the near future.

  1. When.  When must Minnesota LLCs comply with the Revised Act?

The Revised Act will be implemented in stages.  All Minnesota LLCs formed on or after August 1, 2015 are automatically governed by the Revised Act.  If this is your company, double-check to ensure that its documents comply with the new statute.

There is a grace period for Minnesota LLCs existing before August 1, 2015.  Pre-existing LLCs have until January 1, 2018 to comply with the Revised Act.  On this date, all Minnesota LLCs will be governed by the Revised Act regardless of when they were created.  No exceptions.  (NOTE:  Pre-existing LLCs can “opt in” early before the deadline).

  1. What.  What are the major changes in the Revised Act? 

The Revised Act imposes several major changes on Minnesota LLCs. 

First, every Minnesota LLC must have an “Operating Agreement.”  The Operating Agreement is a legally binding “contract” that governs the relationship between the members and sets forth the powers and duties of those who manage the organization.  It can be verbal or written.  Even if your LLC already has a similar “Member Control Agreement,” chances are it does not comply with the Revised Act, which changes some of the default rules concerning the relationship between the members.     

Second, the Revised Act allows LLCs to choose between three different governance structures: (1) member-managed; (2) manager-managed; or (3) board-managed.  This provides Minnesota LLCs with greater flexibility in structuring who will be in charge of the company’s affairs.  For example, the LLC can operate more like a partnership if the members so choose. Or, similar to the existing statute, the company can maintain a corporate-like structure with managers and a board of governors to oversee operations.  The Revised Act allows the owners to choose by making such an election in the Operating Agreement. 

Importantly, if a pre-existing LLC fails to make this election by the deadline on January 1, 2018, the LLC may default to a member-managed organization where each individual member has an equal vote.  This may be problematic for multi-member LLCs where voting rights are currently allocated by ownership percentage (as most LLCs are). 

Third, the Revised Act also provides greater flexibility in modifying or eliminating the standards of conduct for members, managers, and governors of the LLC.  Under the current statute, these individuals owe certain fiduciary duties to each other and the company.  The Revised Act provides greater flexibility to business owners to modify, restrict, or eliminate these fiduciary duties in their Operating Agreement.  This is part of the overall theme of the Revised Act to provide greater deference to LLC owners in managing their own companies.

Conclusion

These are not the only important changes in the Revised Act.  It is important to consult with an experienced advisor to understand what impact the Revised Act will have on your Minnesota LLC.  Failure to do so by January 1, 2018 could have potentially serious consequences for the management and the operation of your company.  You do not want to find out why

Brian R. Christiansen, Esq., is a small-business and franchise attorney with Hellmuth & Johnson, PLLC, a full service law firm in Minnesota.