On August 1, 2015 Minnesota ushered in a new era in LLC governance. Minnesota Statutes 322C, often referred to as the New LLC Act, overhauls the old system and implements a host of new rules and regulations that now govern Minnesota LLCs. We previously featured a post on some of the major changes that would come to pass before the legislation went into effect. Now that the New LLC Act has arrived, here are six things you should know about how it will affect your LLC:
- Corporate Formalities. The New LLC Act is intended to benefit small LLCs by dispensing with many of the previously required corporate formalities. For example, most LLCs are run by one, two, or a handful of members who rarely hold formal meetings, but conduct most of their business online, by email, over the phone, or in person. Acknowledging this reality, under the new law, failure to uphold corporate formalities will not expose these LLC’s to any additional liability.
- Equal distributions. Let’s say that you contributed $9,000 to the start-up costs of the LLC, and your Aunt Gloria contributed $1,000. Under the old rules, you would have been entitled to 90% of the Company’s distributions and Aunt Gloria would have been entitled to 10%. Under the new rules, because there are two of you, you’ll each be entitled to 50% of the Company’s distributions, unless you take some action to alter that default.
- Implied operating agreement. The new law expressly provides that an Operating Agreement may exist solely on the basis of members’ actions, even if there is no written agreement. This means that LLC members must be quite careful about what they say and do. Written agreements are more important than ever under the new law so that a person cannot make the argument that they had a reasonable expectation in X, Y, or Z based upon facts and circumstances alone.
- Limitation of liability. The old law required that governors and managers of the LLC had certain duties to uphold in order to do right by the LLCs that they served. Under the new laws, certain duties remain as default provisions, but the members of an LLC have the option to eliminate most of these duties if they wish to do so. This may be especially important for smaller LLCs, where members wear many hats and may find themselves in a position where they wish to engage in other activities that benefit them personally, but may be detrimental to the LLC itself.
- Member management. Under the old law, an LLC was required to name and be run by a Board of Governors. Under the new law, unless the members specifically elect to be managed by a Board of Governors or by managers, the members themselves will run the LLC. The new default brings the law in-line with the reality that most LLCs are run by one or two members who juggle all roles simultaneously.
- Grace period for older LLC’s. LLC’s organized before August 1, 2015 won’t be governed by the New LLC Act until January 1, 2018. While this grace period means that existing LLC owners don’t have to rush to make any changes, it is important that they speak with an attorney sooner rather than later to discuss how the new law will affect them. Because of the new, streamlined approach that intends to address the real needs of smaller LLC’s, there may even be some benefits for voluntarily electing to be governed under the New LLC Act now.
Have questions about how the New LLC Act will effect your business? Thinking of starting an LLC in Minnesota and wondering what you need to do now? Drop us a line and we’ll be happy to help.