Highlights of the New Minnesota LLC Act

A new LLC Act is coming to Minnesota. In early 2014, Governor Dayton signed a modified version of the Revised Uniform Limited Liability Act, sometimes called RULLCA, into law as Chapter 322C of the Minnesota Statutes. Since it was promulgated by the Uniform Law Commission in 2006, RULLCA has been adopted in 10 states, including California, Florida, and New Jersey, and is continuing to gain acceptance.  

Why in Minnesota? Minnesota’s current LLC Act, Chapter 322B, mirrors the Minnesota Business Corporation Act, Chapter 302A, and takes a very corporate approach to LLC governance. This is at odds with nearly every other LLC Act in the U.S., so attorneys for non-Minnesota parties typically advocate using the Delaware LLC Act. But the complexity of that law, and the potential obligation to litigate disputes in Delaware, can make it inconvenient and costly for Minnesota parties. Chapter 322C, which will replace Chapter 322B in its entirety, adopts a partnership model for LLCs, consistent with most other states’ approaches, and will hopefully reduce the need to go to Delaware.  

How is it different? Chapter 322C differs in a number of ways from Chapter 322B and RULLCA. For example, Chapter 322B’s default rules establish a corporate structure with members, a board of governors, and managers–analogous to shareholders, a board of directors, and officers–whereas Chapter 322C takes a partnership approach and permits three different types of governance structures: member-managed (default), manager-managed, and board-managed. RULLCA does not provide for a board-managed governance structure, but the concept has been maintained in Chapter 322C to support the large number of existing board-managed entities in Minnesota.  

Under Chapter 322C, an LLC’s operating agreement serves as the foundational contract among the LLC’s owners and is the agreement, whether oral, written, implied, or in any combination thereof, of all of the members of an LLC, including a sole member, concerning (i) the relations among the members as members and between the members and the LLC, (ii) the rights and duties of a person in his, her or its capacity as manager or governor, (iii) the activities of the LLC and the conduct of those activities, and (iv) the means and conditions for amending the operating agreement. Thus, it is a hybrid of two traditionally separate documents used by Chapter 322B LLCs–the bylaws and the member control agreement. Moreover, whereas a member control agreement must be in writing, the operating agreement may be an oral agreement or may be created by the course of dealing among members.  

Pursuant to Chapter 322C, unless the operating agreement provides otherwise, distributions by the LLC (before dissolution and winding up) must be made in equal shares (i.e., per capita) among members and dissociated members. Upon dissolution and winding up, any distributions of surplus are made (i) to each person owning a “transferable interest” (i.e., economic interest), in an amount equal to the value of any unreturned contributions, and (ii) in equal shares amongst members and dissociated members. There is no provision specifically addressing the allocation of profits and losses. This differs from Chapter 322B, where distributions, profits and losses must be allocated in proportion to the value of each member’s contribution(s), unless the entity’s organizational documents provide otherwise. (These differences will not affect most LLCs that address these matters in an effective agreement among the members.)    

Unless otherwise provided in an operating agreement, in a member-managed Chapter 322C LLC, each member has equal rights in the management and conduct of the LLC’s activities, i.e., voting is on a per-capita and not per-capital contribution basis. However, in a Chapter 322B LLC, unless otherwise provided in the entity’s organizational documents, members’ voting rights are in proportion to the value of each member’s contribution(s). Finally, whereas Chapter 322B provides statutory dissenters’ rights, Chapter 322C has no statutory dissenters’ rights. Any dissenters’ rights must be contractually-based.  

When do I have to comply? Chapter 322C will become effective on Aug. 1, 2015, for all LLCs formed on or after that date. Any LLCs formed prior to Aug. 1, 2015, may elect to be governed by Chapter 322C, but any Chapter 322B LLC that has not previously elected into Chapter 322C will automatically become subject to Chapter 322C on Jan. 1, 2018.  

What can I do to prepare? For LLCs formed under Chapter 322B, the extent to which documentation may need to be revised for consistency with Chapter 322C will depend on each entity’s specific facts and circumstances. Generally speaking, documents that have been highly customized will require fewer revisions. You may want to consider (i) simplifying your articles, (ii) consolidating the substantive provisions of your existing articles of organization, bylaws, and member control agreement into a single operating agreement, and (iii) eliminating your reliance on any of the statutory defaults contained in Chapter 322B. If you are considering forming a new LLC, include a provision in your operating agreement whereby you automatically elect to be governed by Chapter 322C effective as of Aug. 1, 2015. Your attorney will be a great resource in helping you understand and work through the nuances of Chapter 322C.

You can find the full text of Chapter 322C here.