New Year’s resolutions are often about personal health. If you own a limited liability company, 2018 presents an opportunity to add a resolution related to the health of your business. That’s because big changes are in store for Minnesota LLCs in the coming year. Back in 2015, Minnesota adopted a new LLC act, which is the set of laws that regulate how a limited liability company operates. The act had a three-year period to ease businesses into the new law. That period ends on January 1, 2018, when all LLCs become subject to the new act.
The key change: Everything an LLC does is now governed by a single agreement among the owners, also called members, of the LLC. That document is now called the Operating Agreement, and it rules over all other documents. In the past, an LLC might have had an operating agreement, a member control agreement, a buy-sell agreement, and any number of others that taken together, spell out how the LLC works and how its members work together.
Fortunately, those documents are still valid; the new act tries to preserve them by allowing them to be interpreted under the provisions of the new act. The bad news is that doing so will become difficult over time. More importantly, the new act may produce results that members didn’t expect. It would be a good idea to sit down with your attorney over the next few months to figure out what, if any, changes you need to make to the documents that govern your business. Lawyers understand that business owners would prefer to simply run their businesses instead of dusting off old documents. But spending some time to review your documents now might prevent trouble in the future.
The new act approaches LLC documents differently, which creates potential future problems. For example, the prior act contained default provisions that dictated what to do in certain circumstances. For example, the prior act allowed for a conflict-of-interest issue, such as when a member leases property to the business, to be resolved. Many LLCs don’t have that situation addressed in their governing documents because the statute was there to tell the members what to do. The new Act doesn’t contain similar defaults, so transactions of that nature might be invalid unless the members have agreed to a mechanism to address it in the operating agreement. Another default provision missing from the new act allows members to act without a meeting. If you needed to act as a group, you could do so without all gathering in person as long as the decision was unanimous. You now need to allow that in your operating agreement. The prior act also contained a system allowing members to participate in a pro rata basis in future financings. The new act doesn’t provide that right automatically. If your governing documents are silent on this point, it could result in a member’s proportionate ownership being diluted with respect to others if the members provide additional funding to the LLC. All of these issues can be addressed in a new or revised operating agreement.
The new act also provides some opportunities. For example, you can now limit the LLC’s obligation to indemnify all employees. As a result, you can now limit indemnification to only the individuals that control the business. You can also more carefully define, and limit, a member’s duties to the LLC or other members.
There are other reasons to spend a few minutes updating your documents. If your LLC has been operating for some time, the documents may no longer match business realities. You may have new members, or you may need to add terms for a buy/sell agreement to let you transition your ownership to a new generation. Or you might need to provide for a dispute resolution process to account for potentially diverging interests in the future. It’s much easier to address these events in advance.
Finally, you should consider updating your documents to address new audit rules from the IRS. Starting in 2018, LLCs need to have a partnership representative appointed to respond to IRS audits and represent the business. It’s in your best interest to designate that person in advance, and to give the partnership representative some guidance and duties through the operating agreement.
The new LLC act also gives Minnesota LLC owners quite a few options for structuring and running their business. There are new management systems, new indemnification rules, and new ways to structure members’ obligations to the LLC and other members of the LLC.
These are just some of the issues that LLC owners need to consider in 2018. Please consult your attorney if you have questions, and consider revisiting your current LLC documents.
John Gasele is an attorney at the Fryberger Law Firm, working with business, intellectual property, and utility law. As always, please consult your attorney for legal advice tailored to your specific situation.