Minnesota LLC Governance
Minnesota LLC Governance
The Minnesota Revised Uniform Limited Liability Act – Minn. Stat. (“M.S.”) Chapter 322C – became effective on August 1, 2015, with respect to all newly formed Minnesota limited liability companies.
However, the former body of law – M.S. Chapter 322B – will continue in effect with respect to certain Minnesota limited liability companies formed prior to August 1, 2015, until January 1, 2018, when all Minnesota limited liability companies organized under M.S. Chapter 322B:
- which have not previously elected to be governed by M.S. Chapter 322C,
- will generally be subject to the provisions of M.S. Chapter 322C.
Nevertheless, even after January 1, 2018, certain aspects of M.S. Chapter 322B may continue to govern the affairs of Minnesota limited liability companies organized under the chapter – unless they are modified in an operating agreement.
Minnesota LLC Governance – Chapter 322B
(i) Minnesota LLC Governance – Governors or Directors
M.S. § 322B.606 identified the Minnesota LLC Governance requirement for the appointment or election of a board of governors, by providing in part as follows:
[t]he business and affairs of a limited liability company is to be managed by or under the direction of a board of governors, . . .
In contrast, under the member-management default structure identified in M.S. Chapter 322C, no governors or directors need be appointed or elected.
(ii) Minnesota LLC Governance – Managers or Officers
M.S. § 322B.67 identified Minnesota LLC Governance requirements for the appointment of company managers or officers, by providing in part as follows:
A limited liability company must have one or more natural persons exercising the functions of the offices, however designated, of
- chief manager and
- treasurer.
– which could be held by the same person.
Such default rules recognized that Minnesota limited liability companies governed by M.S. Chapter 322B followed a Minnesota LLC corporate governance model.
In contrast, under the member-management default structure identified in M.S. Chapter 322C, no managers or officers need be appointed.
Minnesota LLC Governance – Chapter 322C
Unlike the limited governance provisions of M.S. Chapter 322B, M.S. § 322C.0407 offers three alternative Minnesota LLC Governance structures:
- member-management,
- manager-management, or
- board-management.
The Minnesota LLC Governance board-management structure was the default rule available under the provisions of M.S. Chapter 322B – which seem to work well for small to medium-sized Minnesota limited liability companies.
However, in order to be competitive with other states which offered a partnership management structure, Minnesota adopted M.S. Chapter 322C – which tends to be more suitable for larger multi-member limited liability companies, or for single-member entities, than for smaller multi-member limited liability companies.
Minnesota LLC Governance Default Rule – Member Management
M.S. § 322C.0407 Subd 1 identifies that the Minnesota LLC Governance default management structure with respect to for-profit Minnesota limited liability companies created under M.S. Chapter 322C is member-management – although an operating agreement can expressly provide for other management structures – by providing as follows:
Subdivision 1. Member-managed default.
Except as provided in section 322C.1101, subdivision 5, with respect to nonprofit limited liability companies,
a limited liability company is a member-managed limited liability company unless the operating agreement:
(1) expressly provides that:
(i) the company is or will be “manager-managed” or “board-managed“;
(ii) the company is or will be “managed by managers” or “managed by a board“; or
(iii) management of the company is or will be “vested in managers” or “vested in a board“; or
(2) includes words of similar import.
Minnesota LLC Governance – Member Management Default Rules
M.S. § 322C.0407 Subd. 2 identifies the default operating rules for a member-managed Minnesota LLC Governance structure, by providing as follows:
Subd. 2. Member-managed company rules.
In a member-managed limited liability company, the following rules apply:
(1) The management and conduct of the company are vested in the members.
(2) Each member has equal rights in the management and conduct of the company’s activities.
(3) A difference arising among members as to a matter in the ordinary course of the activities of the company may be decided by a majority of the members.
(4) An act outside the ordinary course of the activities of the company may be undertaken only with the consent of all members.
(5) The operating agreement may be amended only with the consent of all members.
Minnesota LLC Governance – Partnership Model
The default rules under M.S. Chapter 322C identify that Minnesota limited liability companies will be subject to a Minnesota LLC Governance partnership model – although governance under a corporate model will also be an available option.
Minnesota LLC Governance – Member Voting Rights
M.S. Chapter 322C changes:
- the management structure of Minnesota limited liability companies, and likely
- the actual operations of many Minnesota limited liability companies,
by changing the voting powers held by the respective members of Minnesota limited liability companies.
The Minnesota LLC Governance member-management default rules allocate management functions and authority equally among the members per capita – where each member has one vote – regardless of:
- the amount of their investments, and
- the extent of their ownership rights.
Minnesota LLC Governance – Per Capita Voting Power
M.S. § 322C.0407 Subd. 2 establishes a default per capita basis for voting by members – by identifying that:
- each member is allowed one vote,
- each member has equal management rights, and
[any] difference arising among members as to a matter in the ordinary course of the activities of the company may be decided by a majority of the members.
Therefore, under M.S. Chapter 322C, voting rights are by default, equal among members – unless an operating agreement provides to the contrary.
Minnesota LLC Governance – Alternative Structures
M.S. Chapter 322C allows Minnesota limited liability companies to be organized in a manner similar to either:
- closely held corporations – operating under either a manager-managed LLC structure, or a board-managed LLC structure, or
- partnerships – operating under a member-managed LLC structure.
Minnesota LLC Governance – Operating Agreements
M.S. § 322C.0102, Subd. 17 defines the term Operating Agreement in the following manner:
“Operating agreement” means the agreement,
- whether or not referred to as an operating agreement and
- whether oral, in a record, implied, or in any combination thereof,
- of all the members of a limited liability company,
- including a sole member,
- concerning the matters described in section 322C.0110, subdivision 1.
The term includes the agreement as amended or restated.
M.S. § 322C.0110, Subd. 1 identifies the legal effect of Minnesota limited liability company Operating Agreements, by providing as follows:
Subdivision 1. Operating agreement.
Except as otherwise provided in subdivisions 2 and 3,
the operating agreement governs:
(1) relations among the members as members and between the members and the limited liability company;
(2) the rights and duties under this chapter of a person in the capacity of manager or governor;
(3) the activities of the company and the conduct of those activities; and
(4) the means and conditions for amending the operating agreement.
Therefore, under M.S. Chapter 322C, all matters relating to:
- internal governance,
- management issues, and
- the respective rights and responsibilities of members,
are subject to the provisions of an Operating Agreement.
Minnesota LLC Governance – Document Conflicts
M.S. § 322C.0112, subd. 4 identifies that to the extent there is any inconsistency between the terms of:
- an Operating Agreement, and
- the Articles of Organization – or any other record filed with the Secretary of State’s office,
the terms of the Operating Agreement will prevail – as between members and the Company, by providing as follows:
Subd. 4. Conflicting provisions.
Subject to subdivision 3, if a record that has been delivered by a limited liability company to the secretary of state for filing and has become effective under this chapter conflicts with a provision of the operating agreement:
(1) the operating agreement prevails as to members, dissociated members, transferees, managers, and governors; and
(2) the record prevails as to other persons to the extent they reasonably rely on the record.
Minnesota LLC Governance – Supplemental Principles of Law
M.S. § 322C.0107, identifies that in addition to the terms of an Operating Agreement, other legal principles may govern the activities of Minnesota limited liability companies, by providing as follows:
322C.0107 SUPPLEMENTAL PRINCIPLES OF LAW.
Unless displaced by particular provisions of this chapter,
the principles of law and equity supplement this chapter.
Such principles of law may perhaps be identified in other statutes, judicial decisions, or governmental regulations.
Matters of equity may perhaps be identified primarily in judicial decisions.
Minnesota LLC Governance – Transition Rules Prior to January 1, 2018
M.S. § 322C.1204, Subd. 1 identifies transition rules effective prior to January 1, 2018, which address when, and the extent to which, Minnesota limited liability companies organized under M.S. Chapter 322B will become subject to the provisions of M.S. Chapter 322C, by providing as follows:
322C.1204 APPLICATION TO EXISTING RELATIONSHIPS.
Subdivision 1. Before January 1, 2018.
(a) On or after August 1, 2015, a limited liability company may not be formed under chapter 322B.
(b) Before January 1, 2018, this chapter governs only:
(1) a limited liability company formed on or after August 1, 2015; and
(2) except as otherwise provided in subdivision 3, a limited liability company formed before August 1, 2015, which elects, in the manner provided in its operating agreement or bylaw for amending the operating agreement, to be subject to this chapter.
Minnesota LLC Governance – General Applicability After January 1, 2018
M.S. § 322C.1204, Subd. 2 identifies general rules applicable after January 1, 2018, to all Minnesota limited liability companies, by providing as follows:
Subd. 2. On or after January 1, 2018.
Except as otherwise provided in subdivision 3,
on and after January 1, 2018,
this chapter governs all limited liability companies.
Minnesota LLC Governance – Chapter 322B Rules After January 1, 2018
M.S. § 322C.1204, Subd. 3 identifies general rules applicable after January 1, 2018, to Minnesota limited liability companies organized under M.S. Chapter 322B, by providing as follows:
Subd. 3. Application to existing limited liability company.
For the purposes of applying this chapter to a limited liability company formed before August 1, 2015:
(1) the limited liability company’s articles of organization under chapter 322B at the time the limited liability company becomes subject to this chapter are deemed to be the limited liability company’s articles of organization;
(2) for the purposes of applying section 322C.0102, subdivision 17,
and subject to section 322C.0112, subdivision 4,
the language in
- the articles of organization, and
- any bylaws, operating agreement, or member control agreement of a limited liability company formed before August 1, 2015, that becomes subject to this chapter
will operate as if that language were in the operating agreement of the limited liability company when it becomes subject to this chapter; and
(3) subject to the operating agreement of the limited liability company:
(i) the limited liability company shall keep the records specified in section 322B.373, subdivision 1, clause (11), at the company’s principal executive office, or at another place or places within the United States as determined under section 322B.373, subdivision 1, before the company became subject to this chapter;
(ii) for the purpose of applying item (i), section 322B.40, subdivisions 3 and 4, continue to apply to the limited liability company as if those provisions had not been repealed;
(iii) section 322C.0404, subdivision 1, does not apply to the limited liability company;
(iv) the profits and losses of the limited liability company are to be allocated among the members, and among classes and series of members, in proportion to the value of the contributions of the members reflected in the records required by item (i);
(v) the voting power of each membership interest is in proportion to the value of the contributions of the members reflected in the records required by item (i);
(vi) distributions of cash or other assets of the company, including distributions on termination of the limited liability company, must be allocated in proportion to the value of the contributions of the members reflected in the records required by item (i);
(vii) sections 322B.383, subdivisions 1, clause (1), 2, and 3, and 322B.386 continue to apply to the limited liability company as if those provisions had not been repealed; and
(viii) for the purpose of applying item (vii), section 322B.356, subdivision 1, continues to apply to the limited liability company as if that provision had not been repealed.
Conclusion;
Minnesota LLC Governance
Please contact Minnesota Attorney Gary C. Dahle for assistance with any Minnesota LLC Governance issues.
Legal fees will be applicable for services rendered – and advance payment may be required.
Minnesota LLC Articles of Organization
Minnesota LLC Board Management
Minnesota LLC Dissolution Distribution
Minnesota LLC Operating Agreements
Minnesota LLC Transferable Interest
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Gary C. Dahle – Attorney at Law
2704 Mounds View Blvd., Mounds View, MN 55112
Phone: 763-780-8390 Fax: 763-780-1735
Gary@dahlelaw.com
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