Minnesota’s New LLC Act Adds Simplicity and Flexibility – Part 2

Last week, we wrote about two important changes to Minnesota’s LLC laws, which you can read at this link. This week, we round off our discussion of the major changes with three more. These three changes concern the actual structure and incorporation of LLCs, not just the documents that govern an LLC’s operations and stakeholder relationships.

 

3. Member-, Manager-, or Board-Managed

As we discussed in our previous article, many of the changes to the old LLC law are aimed at simplification. Beyond just reducing redundancies and eliminating requirements, 322C also allows members to choose three unique governance structures for their company. In the past, all LLCs were required to have a Board of Governors, which oversaw and approved certain business actions. The members comprised their own body and made high-level, out-of-the-ordinary decisions.

Now, members can choose to eliminate the Board of Governors by choosing to label their LLC as “member-managed” or “manager-managed.” They can choose whether or not to give managers greater responsibility for business decisions (manager-managed) or to manage the company themselves and make all decisions together (member-managed). These changes could increase business responsiveness and cut down on unnecessary formalities, depending on how involved members are in the operation of the LLC. Members can also choose to create a Board of Governors, which must sign off on most business actions (board-managed). Non-profit LLCs must be board-managed. In addition, members may change the official management status of their LLC over time, providing greater flexibility for adding needed decision-makers and hierarchy.

 

4. Transferrable Interests

Another change affects the rights that can be bought or assigned among members and third parties. Under the old LLC law, members held both financial rights (to distributions of profits) and governing rights (to make decisions for the company). Both of these rights could be transferred, without the member losing his or her member status. Theoretically speaking, it could have been the case that a member could sell of all of his or her financial and governing rights, making them, effectively, a member in name only.

Under 322C, members still retain both kinds of rights, but they can only sell their financial rights, in the form of a “transferrable interest.” Additionally, members may transfer their financial interests to third parties (people outside of the company who may or may not be members of the company already), while retaining governing control of the company. This rigidity, yet flexibility, could benefit members who would otherwise be at the mercy of other members’ assignment decisions. However, members who sold off portions of their governing rights can no longer do so, which could affect some members’ willingness to become members in the first place.

 

5. Shelf LLCs

Lastly, 322C provides for the creation of an entirely new kind of LLC, the “Shelf LLC.” Shelf LLCs are created when an organizer files for an LLC without any identified members. By filing in this way, organizers can reserve a registered name for an upcoming full-fledged LLC, whose terms are being negotiated between prospective members. It also allows organizers to act quickly and fulfill filing requirements far in advance of when the LLC may need to begin operating. This could substantially reduce operational lag time between when members agree to an Operating Agreement and when the LLC must open its doors.

 

If you are a current LLC member or are looking to start an LLC, you should work with an attorney to structure your future company in accordance with future legal requirements, aligned to your specific needs. This two-part article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.

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Minnesota’s New LLC Act Adds Simplicity and Flexibility – Part 1

On April 8, 2014, Governor Dayton signed into law the Revised Uniform Limited Liability Company Act, or “322C.” The law will go into effect on August 1, 2015, bringing many changes and opening the door to new legal possibilities. Although LLCs filed prior to August 1, 2015 will be grandfathered in, by January 1, 2018, all LLCs will be required to follow 322C’s provisions. As such, 322C affects not only existing limited liability companies (LLCs), but also the future LLC landscape. Current and prospective LLC owners can benefit from understanding five significant 322C provisions. Below, we list two important changes to formal LLC documentation. Check back with us next week for three more!

1. Shorter Articles of Organization

Under the old LLC law, Articles of Organization must address a variety of topics ranging from the period of the LLC’s existence to a prohibition on cumulative member voting. In 322C, Articles of Organization are much simpler. Only three pieces of information are required: 1) the name of the LLC (which must still contain the words ‘limited liability company’), 2) the street address of the LLC’s registered office and an agent for service of process, and 3) the name and street address of each organizer (usually the lawyers who file the Articles of Organization). The other elements that used to be included in the articles of organization are now diverted for inclusion in the “Operating Agreement,” a private document between the owners of the LLC, who are called members.

This change has both benefits and consequences. On the benefits end, generally speaking, it is best to keep as much information about private companies out of the public domain. The change could also benefit owners if they would like to make changes to voting rights protocols, for example, because voting rights terms can be in the Operating Agreement. It is sometimes much easier to amend documents other than Articles of Organization. Therefore, this change could make it easier for members to change LLC governing provisions that used to be integral parts of Articles of Organization. However, making these and other changes easier may have a negative effect on minority-stake members, who before had greater power to stop revisions since unanimity is sometimes required to amend the Articles of Organization.

2. The Operating Agreement

The old LLC law used to provide for the creation of By-laws and Member Control Agreements. These two documents governed different aspects of the company’s operations and the relationships between members and managers (those who are hired to run the company). With 322C, these two different documents are combined, along with the above-mention parts in the old Articles of Organization, into the Operating Agreement. As a result, all relationships, duties, and rules are stationed in one document, for all to see.

Consolidating all of these operational documents into one clarifies each stakeholder’s rights and obligations. It also makes it much easier for owners to adapt how the company is run; members only need to amend one document now. Lastly, in some circumstances, when members contract in advance to form a new LLC, they can actually use the joint agreement between them as an Operating Agreement. This allows prospective members to hash out operational details in advance and clarify their duties to each other before filing the Articles of Organization. However, by merging LLC governing documents into the Operating Agreement, everything is out in the open, making it harder for any sensitive information to be kept confidential internally and externally. It may also threaten some members’ interests because other members may attempt to bargain and negotiate for changes to multiple parts of the document in exchange for the introduction or amendment of single, specific terms.

 

Check back next week for three more interesting changes. If you are a current LLC member or are looking to start an LLC, you should work with an attorney to structure your future company in accordance with future legal requirements, aligned to your specific needs. This two-part article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.