The New Minnesota LLC Act: What Business Owners Should Know

Jacob Ouradnik, CPA, began with Abdo, Eick & Meyers in 2015 after completing his Master of Science in Accounting. He works extensively with partnership and LLC taxation, formation and other related areas throughout a variety of industries. Jake can be reached at jacob.ouradnik@aemcpas.com or 507.304.6808.

LLCs were first recognized in Minnesota in the early 1990s. Since then, they have become one of the most common—and popular—choices when organizing a business. In recent years, Minnesota adopted a new act that aims to make the state more business-friendly and the structuring of LLCs more flexible and efficient.

The Minnesota Revised Uniform Limited Liability Company Act (referred to as the “new LLC act”) was passed in 2014, but the most important date for LLCs and business owners to be aware of is January 1, 2018. On this date, all LLCs organized in Minnesota under Chapter 322B (the “old LLC act”) will become subject to the new act under Chapter 322C. LLCs established on or after August 1, 2015, have already been subject to the new LLC act. 

What does this mean for my LLC?

The new LLC act made several changes that could affect nearly every aspect of an LLC, including its organization, management, business model—and even its appeal to potential investors. Below are a handful of the more significant changes:

• Operating Agreement – Under the new LLC act, an agreement may be written, oral, or implied by action, or it may be a combination of the three. (The old act required the agreement to be in writing and signed by all members of the LLC.) If your LLC already has articles of organization, an operating agreement, or a member control agreement that was drafted under the old act, the new act will combine those documents and recognize the compilation as your operating agreement.
• Default Voting Rights – Under the old LLC act, voting power was proportional to the value of each member’s capital contributions. The default rule under the new LLC act calls for each member to receive equal voting rights, unless stated otherwise in the operating agreement.
• Default Distributions – Similar to voting rights, the new LLC defaults to distributions prior to termination being on a per capita basis, rather than per contribution. This means that distributions prior to termination should be in equal shares among the members, unless otherwise stated in the operating agreement.
• Governance Rules – Management structure under the old LLC rules was very similar to the corporate model and included a board, the members, and the managers of the LLC. The new LLC act defaults to a member-managed LLC but also allows for the option of a manager-managed structure. In a manager-managed LLC, the manager may either be an individual or another entity. 

Key changes to the rules regarding default voting rights and distributions are prime examples of why it is crucial, now more than ever, to have a written operating agreement that establishes and/or solidifies the underlying agreements approved by each member when they joined the LLC. 

What are potential benefits?

Although many of the changes under the new LLC act relate to default rules and things of the sort, several changes will help to make the formation of an LLC much more flexible. The new act resembles that of the partnership model. As such, it has language that speaks to some of the more unique transactions that we see today. This includes allowing members to define member activities, duties and contractual obligations more clearly, which should drive the state toward the business-friendly environment that so many have pushed for. Ultimately, it should help investors find greater appeal in Minnesota-organized LLCs.

What actions should I take?

• If you’re a member of or involved in an LLC, the new act should, at a minimum, serve as a reminder to review and become familiar with your LLC’s governing documents and agreements. This transition also serves as an excellent opportunity to amend an LLC agreement to clarify and/or update existing items or to address new areas.

• If your Minnesota-organized LLC was established prior to August 2015, you and your members may want to meet with an attorney to discuss your specific situation. It’s wise to fully understand exactly how these changes could affect you. 

• It’s also a good idea to talk with your AEM accountant to see how the new act could impact business or tax-related situations specific to your LLC. 

The intention of this letter is merely to inform you of matters that may concern you. We are not attorneys and cannot give legal advice. We urge you to consult appropriate legal counsel concerning this matter to see how the new law impacts you.