By: Candace M. Groth
Up until recently, Minnesota LLC’s were governed by 322B, a statute modeled on Minnesota’s corporate statute. 322B included extensive corporate formalities, dissenter’s rights, a board of governor’s structure, etc. However, as of August 1, 2015, the entire structure of Minnesota LLC’s has changed. Although Delaware may have previously been the state of choice for some large companies seeking enhanced predictability, flexibility, and certainty; Minnesota and its new LLC Act 322C should now be at the top of every MN business owner’s list for a possible state of formation.
Implementation:
The Minnesota LLC Act (322C) was passed by the Minnesota Legislature in 2014. The initial implementation date for the act was August 1, 2015. As of that date, all newly formed LLC’s became subject to the new LLC Act. The legislation also included a delayed implementation schedule for LLC’s formed prior to August 1, 2015. All LLC’s formed prior to August 1, 2015 will we be governed by the old LLC Act (322B) until January 1, 2018, at which time all Minnesota LLC’s, new and old, will become subject to 322C only. During the implementation period, existing LLC’s can elect to be governed by 322C by filing an election with the Minnesota Secretary of State.
Key Differences:
The New Minnesota LLC Act differs in several significant ways from the old Minnesota LLC Act . Firstly, and most importantly, the new Minnesota LLC Act mirrors most other states by being based on a partnership model rather than a corporate model. The partnership model is much more flexible, uniform, and business friendly for the average small business owner.
Additionally, the act has several key features that make Minnesota LLC’s more attractive including:
1. Simplified minority sharehold rights, deadlock remedies,and oppression judicial remedies
2. Codification in the statute of Duty of Care requirements for Members, and the ability to eliminate many duty of care responsibilities through the LLC Operating Agreement. This is an improvement of the old act under which the duty of care requirements were determined by the Minnesota Courts.
3. Protection of voting/governance rights from third party transferees while permitting transfer of financial membership interest rights.
4. Introduction of the Special Litigation Committee
Furthermore, 322C eliminates several items that had been problematic and complicated for Minnesota LLC owners including:
1. Cumulative voting
2. Dissenters rights
3. Pre-emptive rights
Overall, the new LLC act is a strong step toward certainty and flexibility for Minnesota LLC owners.
Structuring an LLC under the New Act:
Structuring an LLC under the new Act provides greater certainty but also enhanced flexibility for business owners, above options offered by Delaware and other states. These options include the following:
1. Choice of Management Stucture: Minnesota LLC owners have a choice of three different LLC management structures including:
a. Member-Managed: The default structure for new LLC’s. Management of the LLC is vested in the Members of the LLC directly.
b. Manager-Managed: An optional structure. Management of the LLC is vested in one or more managers of the LLC, who are appointed by the Members. Managers are very similar to officers, and may be Members, but do not necessary have to be.
c. Board-Managed: An optional stucture and unique to Minnesota. Management of the LLC is vested in a board of governors, similar in structure to board of directors of a corporation.
2. Operating Agreement replaces the Member Control Agreement and Bylaws: The Operating Agreement can do everything that the old Member Control Agreement and Bylaws could do in terms of structure for the LLC.
3. Per Capita Voting: Each owner has one vote unless specified otherwise in the operating agreement.
4. No default allocation of profits and losses to members:The Act provides maximum flexibility for the members to allocate profits and losses of the LLC as they wish.
5. Significant exculpation of members, managers, or governors from liability for breaches of duty of care: absent self dealing or duty of loyalty breaches, the owners can eliminate the duty of care for the governing individuals, providing maximum protection for those managing the LLC.
6. Continued Flexible Tax Structure: A Minnesota LLC can be taxed as a disregarded entity (single-member), partnership, S-Corporation, or C-Corporation.
Business owners, particularly those located in Minnesota, have even more reasons to consider Minnesota for their LLC business with the advent of 322C.