Exercise. Eat Right. Sleep eight hours. Read. Things many of us have resolved to do more in 2017.
We may also have made resolutions for our businesses. One obvious but still often overlooked action every small business owner should consider is to establish an entity for the business, such as a limited liability company (LLC). While the ease of working as a sole proprietor may be appealing, the personal liability protection of an entity should outweigh these potential conveniences. Indeed, while an LLC generally limits the owner’s or owners’ liability exposure to losing the assets owned by the LLC, the owner of a sole proprietorship is personally liable for every debt and obligation incurred by the business. Pass-through taxation and greater ability raise new capital, bring in new owners, and transfer contracts, licenses, and other business assets are other benefits of using an LLC. And, the owner of a single-member LLC is not required to file separate personal and business tax returns.
Now is a particularly good time to start or transition a business to an LLC given the relatively recent overhaul of Minnesota’s LLC statute. And, for existing LLCs, now is the time to begin taking advantage of the increased flexibility and other benefits the new LLC statute provides.
The Minnesota Revised Uniform Limited Liability Company Act (codified in Minnesota Statutes Chapter 322C) became effective August 1, 2015 and already governs all Minnesota LLCs formed after that date. But, LLCs formed before August 1, 2015 will remain subject to Minnesota’s “old” LLC statute until January 1, 2018, unless their owners elect to be governed by the new LLC statute immediately. The new statute includes a number of changes that benefit LLCs and their individual members, including decreased formality for the formal agreement among members and members’ ability to define the specific duties that they have to one another and to the LLC.
Under the old LLC statute (Minnesota Statutes Chapter 322B—as noted, it governs pre-August 1, 2015 LLCs until January 1, 2018, unless LLC members opt into the new statute earlier), a written member control agreement (“MCA”) signed by all members is required to define the aspects the LLC’s business and affairs and the members’ relationships with each other and the LLC. Any matter not expressly addressed in the MCA is “filled in” by the provisions of the statute as if it were part of the written MCA.
In contrast, the new LLC statute requires only an “operating agreement” among the members that may be oral, written, implied, or any combination thereof. Thus, if members agree regarding some aspect of the LLC’s business, but neglect or are unable to immediately amend their written operating agreement, the agreement may still be enforced.
Under the old LLC statute, members cannot alter or define the various fiduciary or other legal duties that govern their relationships with the LLC and each other. A “fiduciary” duty is the duty to act in the best interests of another and generally involves the highest legal obligation of good faith, loyalty, integrity, and fair dealing. The consequences of violating such a duty can be harsh. Although the fiduciary and other duties LLC members owe to one another and to the LLC are settled as legal concepts, they are often difficult to apply in the nuance of life, not to mention when a member sues claiming other members have violated a duty.
But, under the new LLC statute, as long as the terms are not “manifestly unreasonable,” members may more specifically define their legal duties to one another and to the LLC. For example, members may include terms in their operating agreement that:
- Permit and define a member’s ability to compete with the LLC;
- Define specific conduct that will not violate a member’s duty of loyalty to other members and the LLC;
- Modify a member’s duty of care in conducting LLC business, except to authorize intentional misconduct or knowing violation of law;
- Modify any other fiduciary duty owed by members; and
- Define how to measure members’ contractual obligation of good faith and fair dealing with each other.
LLC owners who take advantage of these opportunities create more predictability in the governance of their business and in how a court may decide a member’s claim for breach of a duty.
With the new LLC statute already in operation, every new LLC formed will be subject to it and can utilize its advantages right away. Most LLCs formed before August 1, 2015 would benefit from electing to be governed by the new statute immediately and amending their operating agreements to take advantage of the more flexible approach to governance and management of the LLC’s business. Consulting with an attorney and accountant is often the best way to understand and implement the benefits most valuable to your business.
Accordingly, whether you’ve resolved to start a new business, transition from a sole proprietorship to an entity, or gain increased flexibility and predictability in operating your existing LLC, Minnesota’s new LLC statute provides many benefits that should ensure that your resolution (unlike some others, perhaps) will stick.
Eric Johnson is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing primarily in the areas of Business Litigation, Appeals, and Banking/Lending Services. This article is not intended to provide legal advice. You should always consult an attorney regarding your specific circumstances.