Under the Minnesota Revised Uniform Limited Liability Company Act (“Minnesota Revised LLC Act”), which applies to all Minnesota limited liability companies as of January 1, 2018, it is recommended that a Minnesota limited liability company enact an operating agreement. Under the Minnesota Revised LLC Act, failure to implement an operating agreement can have significant negative consequences for Minnesota limited liability companies.
Minnesota Revised LLC Act
On April 11, 2014, Minnesota Governor Mark Dayton signed into law the Minnesota Revised LLC Act. The Minnesota Revised LLC Act became effective for all new Minnesota limited liability companies as of August 1, 2015. It did not apply to existing Minnesota limited liability companies until January 1, 2018 unless those LLCs opted to be governed by the new law. As of January 1, 2018, however, all Minnesota LLCs are automatically governed by the revised law.
The Minnesota Revised LLC Act transitions away from Minnesota’s earlier, corporation-based limited liability company act towards a partnership-based model, putting Minnesota limited liability company law in line with the laws of Delaware and the other states that have adopted the Revised Uniform Limited Liability Company Act in recent years. Under the Minnesota Revised LLC Act, it is now imperative that the LLC adopt an operating agreement or else statutory default provisions that may not be suitable for the particular LLC will take effect.
Operating Agreement Myths
Myth: Operating agreements are redundant and create more work.
Fact: Operating agreements are used to replace statutory default provisions and set forth the rights and duties of the company and its members. Without an operating agreement, limited liability companies are forced to rely on statutory default provisions, articles of organization, and even verbal or implied agreements based on a course of conduct. Oftentimes, the combination of different governing documents (both formal and informal) and verbal or implied agreements can result in conflicting provisions and uncertainty as to a member’s rights or duties. An operating agreement acts as a means to combine the limited liability company’s governing documents into one contract by and between the members and the company. Operating agreements provide certainty to current and future members and a means to ensure that members’ expectations are protected and memorialized.
Myth: I’m the only member of my LLC; I don’t need an operating agreement.
Fact: Even single-member LLCs benefit from having an operating agreement. An individual often elects to operate as a limited liability company (rather than a sole proprietor) primarily to limit his or her personal liability for the debts and obligations of the business. Complying with corporate formalities, such as adopting an operating agreement, helps minimize the chance that creditors of the business can successfully “pierce the corporate veil” to pursue the personal assets of the single member of the LLC.
Myth: The Minnesota Revised LLC Act adequately protects LLC members’ best interests.
Fact: Each member’s interests in an LLC depends on the member’s own position, contributions, purpose for owning the LLC, involvement in the LLC’s day-to-day affairs, expected duration for staying involved in the LLC, and long-term objectives. These are things that a statute cannot fully contemplate. Although the Minnesota legislature has attempted to modernize the Minnesota Revised LLC Act and create default provisions that it deemed appropriate for a wide range of circumstances, each business is unique. Drafting a carefully tailored operating agreement provides the best opportunity for clearly setting forth the rights and responsibilities of each member of the LLC.
Myth: I don’t need an attorney to help draft my LLC operating agreement.
Fact: It is true that LLC members are not required to hire an attorney to draft their operating agreement or other LLC governance documents. However, a Minnesota corporate attorney familiar with the Revised LLC Act will understand the default provisions under the Act, advise you whether those default provisions make sense for you, and guide you through the process of drafting an operating agreement that suits your particular needs. Often the Minnesota business lawyer can draft an operating agreement for a predictable and reasonable flat fee.
Conclusion
Establishing a written operating agreement is strongly recommended for Minnesota limited liability companies under the Minnesota Revised LLC Act. New and existing Minnesota limited liability companies are governed by the Minnesota Revised LLC Act, which took full effect on January 1, 2018 for all Minnesota LLCs. It is good business practice to enact an operating agreement to comply with the Minnesota Revised LLC Act.
The Minnesota business attorneys at Trepanier MacGillis Battina P.A. can help you navigate and comply with the law’s requirements for organizing your LLC.
____________
About the Author:
Minnesota business attorney James C. MacGillis advises clients on corporate and business law matters such as business entity formation, business transactions, and corporate governance, including compliance with the Minnesota Revised Uniform Limited Liability Company Act. Jim is a trusted Minnesota corporate attorney and may be reached at 612.455.0503 or jmacgillis@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota business law firm located in Minneapolis, Minnesota.