LLC Statute Updates
Enacted on April 15, 2022, and published the next day, 2021 Wisconsin Act 258 repealed and replaced Chapter 183 of the Wisconsin Statutes, which governs limited liability companies. The updated statute completely replaces the prior LLC statute in favor of one that closely follows the Revised Uniform Limited Liability Company Act (RULLCA), making Wisconsin one of 23 states to adopt some version of RULLCA, or have legislation pending to adopt it. This article will outline the changes to the various sections of the new Wisconsin LLC statute, with a focus on the substantive changes rather than any organizational alterations in the structuring of the statute. While the revised statute closely follows the most recent amendment of RULLCA from 2013, there are certain modifications by the Wisconsin Legislature that keep the old law to better integrate the statute with the rest of state law. Note, this article attempts to summarize the most substantial changes to the Wisconsin LLC statute. For a more in depth look at the new statute, you may find the full document on the Wisconsin Legislature’s Website. (https://docs.legis.wisconsin.gov/statutes/statutes/183/).
The recent statute revisions made significant changes to LLC operating agreements. This contractual document entered into by members of an LLC includes information about how the LLC will be managed, who owns the business, and what the structure of the LLC will be. While the prior statute required operating agreements to be in writing, it did not require one in order to form an LLC. The new statute now requires an operating agreement as a condition of forming an LLC, but allows the agreement to be written or oral, and express or implied. At the same time, some changes to an LLC are only valid through a written operating agreement. The operating agreement specifically governs five matters:
- relations, both between the members and between the members and the LLC,
- the rights and duties of managers,
- the activities and affairs of the LLC and the conduct of those activities and affairs,
- the means and conditions for amending the operating agreement, and
- mergers, conversions and other business combinations.
Where issues arise that are covered by these five points, but are not mentioned in the operating agreement, statutory provisions will apply. In this way, the new statute gives more guidance on when an operating agreement’s provisions override contrary statutory provisions. Importantly, the new statute lists statutory provisions that the operating agreement cannot alter (with exceptions), including eliminating or restricting remedies for breach of the contractual obligation of good faith and fair dealing. Additional changes to the operating agreement include that:
- individuals may now become members of an LLC through any way provided in the agreement,
- LLCs are member-managed by default, unless specified otherwise in a written operating agreement, and
- additional rules apply to one-member LLCs.
Articles of Organization
The new statute makes changes to the provisions of the Articles of Organization, which must be filed with the Wisconsin Department of Financial Institutions (DFI). Previously, the Articles were quite formal, needing to contain specific information and nothing else. Now, additional information may be included in the articles, such as the purpose of the LLC’s formation and regulating the powers of the LLC, its members, and managers
Authority of Members
Under the new statute, members no longer have “apparent authority” as agents of an LLC simply by virtue of being part of a member-managed LLC. However, the LLC can file with the DFI a statement of authority that describes the authority of any position or individual in the LLC. Conversely, anyone named in such a statement may also file a statement denying such authority.
Member & Manager Duties
Under the prior statute, LLC members and managers could not act in a way that would amount to misconduct or willful failure to deal f airly with the LLC, where a conflict-of-interest existed. Under the new statute, members and managers that manage the LLC owe duties of loyalty and care to their fellow members, as well as the LLC, and must exercise those duties consistent with contractual obligations of good faith and fair dealing. However, a member does not violate a duty solely because the member’s actions benefited the member’s own interests. Additionally, where an act of a member would otherwise violate the duty of loyalty, all members may authorize the act after all material facts are revealed. While a written operating agreement cannot eliminate or restrict the remedies for a breach of contractual obligations of good faith and fair dealing, the agreement may specify the standards by which a member is judged to have lived up to his or her obligations of good faith and fair dealing.
While not required, written operating agreements appear to be favored, being given more freedom to prescribe the operations of an LLC. For example, while an operating agreement cannot alter, restrict, or eliminate the remedies available for a breach of the duty of loyalty or care, a written operating agreement may specify the method by which conduct that would normally violate the duty of loyalty may be authorized after full disclosure of the material facts. A written operating agreement may even alter the duty of care or loyalty or alter/eliminate any other fiduciary duty (subject to restrictions).
Members have certain rights to informational records of the LLC, and the details of these requirements differ under the new law. The new statute states that managers of manager-managed LLCs also have a right to this information. The LLC must supply information to member-managers or manager-managers, without request, concerning an LLC’s (i) activities (ii) affairs (iii) financial condition and (iv) other circumstances material to properly exercising the members’ and managers’ rights and duties. Additionally, managers of an LLC must be given, without request, all relevant information before voting on a matter.
Dissociation of Members
The new statute allows members to dissociate from an LLC, stating that members can leave at any time, rightfully or wrongfully, by giving the LLC express notice of their dissociation. “Wrongful” dissociation occurs where dissociation is in violation of the operating agreement. The effects of dissociation are also laid out, including (i) an inability to participate in management of the LLC, (ii) relief from any member duty with respect to events that occur after dissociation, but (iii) a dissociated member’s liability continues for events that occurred before his or her dissociation. Where dissociation is “wrongful,” the new statute lays out an individual’s liability to the LLC and its members for damages caused by the wrongful dissociation.
The previous rules required the LLC to distribute to any ex-member the fair market value of his or her interest in the LLC upon dissociation from an LLC,, unless the operating agreement stated otherwise. The new law makes distributions to dissociated members discretionary on the LLC and governed by the operating agreement. It further states that any amendments to the operating agreement made after a member has dissociated will not be effective in imposing new requirements on the ex-member. Lastly, the new statute expands on old provisions under which a creditor to an LLC member may satisfy its judgement against the member through a “charging order” against the member’s transferable interest in the LLC.
With regard to dissolving an LLC and winding up its activities, the new statute modifies the grounds for these procedures and specifies the order in which an LLC’s assets should be used to pay creditors, members, dissociated members, and others. One new basis for dissolving the LLC is where the LLC has no members for a period of 90 consecutive days. However, LLCs no longer may be dissolved by the courts due to the LLC not acting in conformity with its operating agreement. One procedural difference that may confuse individuals is that the “articles of dissolution” previously filed with the DFI are, under the new statute, referred to as the “statement of dissolution.”
Under the old law, the DFI could dissolve an LLC one year after it failed to file an annual report. Now, the new law has added a number of additional reasons justifying the DFI to dissolve an LLC, including failure to pay fees or penalties, and the lack of a registered LLC agent. The new law also departs from RULLCA by retaining provisions from the prior law that require any distributions made by an LLC, before its dissolution, to be made proportionally among members/dissociated members based on the amount they have contributed to the business.
Mergers, Conversions, and other Business Combinations
Another section of the statute that has undergone significant changes is the mergers, conversions, and other business combinations section. With respect to mergers and conversions, subject to new requirements, the new statute allows LLCs to transact in the form of an interest exchange or domestication. It should come as no surprise at this point, that the terms of any merger, conversion, interest exchange, or domestication, are usually governed by the LLC’s operating agreement. The new statute places restrictions on these types of transactions where such an occurrence would increase the obligations of any members in any LLC involved. This restriction, however, can be avoided where (1) members consent, or (2) members’ consent was obtained in the (you guessed it) LLC’s operating agreement.
There are other changes to the statute that also warrant mentioning. LLCs now have perpetual duration by default. Like corporation shareholders, LLC members may now bring derivative actions against an LLC, and the LLC may form a special litigation committee in response to such an action. Finally, Where the LLC needs to correct a document that has been filed with the department, the form submitted, previously called the “articles of correction,” are now referred to as the “statement of correction” or “statement of change,” depending on the circumstances.
The statute will take effect on January 1, 2023 and will apply to all existing and future LLCs. However, an LLC may opt to have the new statute apply sooner by amending its operating agreement. LLCs formed before the statute takes effect may also opt out of the new statute prior to December 31, 2022, to remain governed by the old statute. Additionally, any provision of an operating agreement that is valid under the previous law will remain valid under the new law.