THE NEW CHANGES TO WI LLC LAW GO INTO EFFECT ON JANUARY 1, 2023
As you may have heard, the Wisconsin Legislature has passed a new law governing the formations and operations of limited liability companies (LLCs) in Wisconsin. On January 1, 2023, the new Uniform Limited Liability Company law will apply to all Wisconsin LLCs unless an LLC explicitly opts out before December 31, 2022.
That means you you have less than ten business days to opt in or opt out.
The new law has kept many of the previous rules in place but also has adopted some key changes in how LLCs operate in Wisconsin.
Designation as Member- or Manager- Managed LLC
One of the key changes revolves around the management of the LLC. Currently, when an LLC is formed, the articles of organization need to indicate whether the LLC will be member-managed or manager-managed. Meaning that the decision-making power, whether with all the members or set with a manager or managers, needs to be determined at the filing of the articles of organization. After January 1, individuals forming new LLCs will no longer need to indicate when filing the articles of organization, the management structure of the organization. The management structure will only need to be indicated in the operating agreement, which makes changing the management structure a less intrusive process. If an LLC fails to indicate which management structure they will be choosing, the new law will default on the LLC to the member-managed structure.
Definition of Operating Agreement
Another key change is the statutory definition of an “operating agreement”. Currently, an operating agreement is defined as a document that describes the overall rights of the members of the LLC and describes in more detail the management structure of the LLC, but it must be in a written format. After January 1, there is no longer a requirement that the operating agreement only be in written format. An operating agreement can exist in oral format or implied through the actions of the members or combination of all the types. It is important for existing LLCs that have written operating agreements that there is a clause in the operating agreement that explicitly states that the written form of the operating agreement is the sole agreement between the members of the LLC and other types of understandings or agreements between the members do not supersede the written contents of the operating agreement otherwise your phone conversation or chat in the hallway with your fellow members could become an actual agreement.
Fiduciary Duties of Members and Managers
Another key change is in regard to the duties of Members and Managers of the LLC. Currently, members and managers only have a minimal fiduciary duty and are prohibited from performing certain actions. Including: (1) intentionally failing to provide a fair deal to an LLC or the members from a member who has a conflict of interest; (2) violations of criminal statutes; (3) performing a transaction in which a member or manager receives an inappropriate personal profit; (4) intentional misconduct under the LLC. As of January 1, it is now clearly laid out that all members in an LLC have a duty of loyalty and care, similar to that of directors of corporation. The duty of loyalty requires LLC members and managers to act in good faith and refrain from self-dealing. Members and managers must also not exploit any of the organization's business opportunities for their own personal gain. The duty of care is a fiduciary duty requiring LLC members and managers to make decisions that pursue the LLC's interests with reasonable diligence and prudence. This fiduciary duty is owed by LLC members and managers to the LLC, not the LLC's stakeholders or broader society. An operating agreement can partially excuse a member’s duties. For example, this means that a LLC can authorize certain actions by a member that would otherwise be a breach of the duty of loyalty or duty of care as long as the operating agreement allows for such activities.
Member Access to Information
An additional change is in regards to a member accessing information about the LLC. Currently, a member of an LLC has to request to review company records and such records not related to those that affect a member could be limited by the language of an operating agreement. After the new year, a member will have more rights regarding information about the LLC. A member can make a reasonable request for information about the LLC, and it is not solely related to information that affects the member. Additionally, no operating agreement can input an unreasonable restriction on a member's right of access of information about the LLC. It is also now the duty of the LLC to provide its members with information.
Vote Required to Merge, Convert, or Change LLC Domestication
In addition to granting members more rights regarding information about the LLC, there are more changes to when an LLC wishes to merge, convert or change its domiciled state. Currently, only a 51% majority of members needed to approve such a change but after January 1, the approval needs to be all of the members, unless an operating agreement indicates otherwise.
Authority to Bind the LLC The last main change to the LLC law involves a member’s authority to bind the LLC. Currently, any member in member managed LLC or manager in a manager-managed LLC can bind the LLC as they are considered ana agent of the LLC. After January 1, just because a member is member of an LLC does not grant the agent status to that member and the member loses the authority to bind the LLC to an obligation executed by the member. An LLC can file a statement of authority with the state indicating which members have the authority to bind the LLC and if there are any limitations on the authority granted to those members. It is considered to be notice to a third party about which member has the authority to bind the LLC. It is effective for five years at a time unless amended before then.
To Opt-In or Opt-Out That is the Question LLCs have 3 options for handling the changes to the LLC Law. They are:
Do nothing – If you take no action, your LLC will be subject to the new LLC law.
Opt-In – If you file a Statement of Applicability before December 31, 2022, you will be subject to the new LLC law.
Opt-Out – If you file a Statement of Nonapplicability before December 31, 2022, you will not be subject to the new LLC law.
If you are concerned about whether your LLC operating agreement accounts for some of these new changes or whether you should opt in this new LLC law, contact our office and we can help you to decide whether you should opt out of the new LLC law. It is important to do this as soon as possible as filing a statement of nonapplicability will require a vote of the members for multi-member LLCs.