When clients come to us to ask what type of company they should form, they are often familiar with the basics of what having a limited liability company versus a corporation might mean for them. We provide some guidance, but just as often will consult with an accountant or tax advisor, as in Minnesota, the choice of an LLC vs corporation often comes down to tax treatment. However, the Minnesota legislature completely changed this on April 11, 2014, when the Minnesota Revised Limited Liability Company Act (the “New Act”) was approved. (It seems changing the rules of LLCs is one thing everyone in the MN legislature can agree on, since this passed unanimously in the House and Senate.) So what do these changes mean for you if you have a Minnesota LLC or are thinking of starting one?
- If you have more than one owner in an existing LLC you should talk to an advisor ASAP. Although companies have a few years (January 1, 2018) before the New Act becomes the default, the best idea is to speak to an advisor right now about how the changes may affect your company. Major changes to Minnesota’s default rules for LLC’s may have unintended consequences for members, in that distributions will now be made per capita, not per contributions. Under the old act, the default rules determined that the percentage you – the member – received in distributions was tied to the value of your contributions (something that should have been detailed in a Contribution Agreement upon buying into the LLC). For example, if you put in $80 and the other 2 members put in $10 each, absent agreement to the contrary your distributions would be 80/10/10. Under the New Act, however, if you do not specify otherwise in the operating agreement, your distributions would be 33/33/33. This can be quite an unpleasant surprise to the majority owner (and a windfall for the 2 minority owners). So, consulting with an advisor to make sure your LLC documents say what you want is vital before the default deadline. And since ownership disputes can pop up any time, the sooner the better is a good rule here.
- If you are forming an LLC in Minnesota this year, be mindful of the date. The new act becomes the default for existing LLCs in 2018, but if you form an LLC in Minnesota on or after August 1, 2015 you’ll be automatically subject to the New Act. Don’t let that date give you a false sense of security though – if you’re forming a company at all at this point, it makes sense to know what the New Act would change. When ownership disputes erupt everything becomes an argument, and taking something (what law each owner thought governed the company) out of the list of potential points of contention is always a good thing.
- For the most part, the new changes will benefit majority owners. Generally, legal advisors don’t like general rules, but in this case it’s pretty clear. Other than the per capita change detailed in (1) above, the new defaults work in favor of majority owners. This is to be expected, since many felt the previous Minnesota LLC rules did not allow enough certainty for majority owners, who – as a result of such uncertainty – often favored Delaware and other jurisdictions for entity formation. The New Act allows the company operating agreement to modify or completely eliminate certain duties owners have toward each other and the company. Often, minority owners in LLCs have relied on these duties to force majority owners to treat them fairly, but now these can be modified and in some cases eliminated in the formation documents. The New Act also narrows the instances in which a court can make a decision contrary to the terms of the Company’s Operating Agreement buy-sell provisions in the interest of fairness to a minority owner. These changes make it even more imperative that minority owners seek advice before agreeing to the terms in company documents.