In April 2022, Wisconsin adopted the Wisconsin Uniform Limited Liability Company Law (the “New LLC Law”), that will become effective January 1, 2023 and will replace the old LLC law (the “Old LLC Law”). The New LLC Law modifies how limited liability companies (LLCs) are governed in this state. All Wisconsin LLCs created after January 1, 2023 will be subject to the New LLC Law. However, the New LLC Law gives LLCs organized before January 1, 2023 a choice: either be governed by the New LLC Law or opt out and continue to operate under the Old LLC Law.
This article describes the opt-out option that is available to LLCs and discusses some of the features of the New LLC Law that should be considered when deciding whether to opt out.
Opt-Out Option
Preexisting LLCs can choose to opt out of the New LLC Law by filing a statement of non-applicability with the Wisconsin Department of Financial Institutions (DFI) by December 31, 2022. Preexisting LLCs that opt out of the New LLC Law will (mostly) be governed by the Old LLC Law. If a statement is not filed with DFI by the end of the year, the preexisting LLC will automatically be opted into the New LLC Law. Note that if a preexisting LLC opts out of the New LLC Law initially, it can still choose to opt into the New LLC Law later by filing a statement of applicability. However, once an LLC is governed by the New LLC Law, it will no longer be able to opt out. The statement of non-applicability and statement of applicability can be found on the DFI’s website here.
As discussed below, for preexisting LLCs with written operating agreements, the choice between the Old LLC Law and the New LLC Law may be a little less stark. The New LLC Law allows many provisions of a preexisting LLC’s operating agreement to continue to govern the LLC after January 1, 2023, even if inconsistent with the New LLC Law as long as those operating agreement provisions are valid under the Old LLC Law.
Many provisions of the New LLC Law are like the Old LLC Law. For instance, under both laws, an LLC is a distinct legal entity separate from its members; an LLC can still either be managed by its members or by managers; and, an operating agreement still establishes the rules and structure of the LLC. However, there are some differences, some of which are discussed below. The changes discussed below are not all the changes in the law and readers are encouraged to study the new law and consult with counsel to determine the effects of the New LLC Law on their business.
Articles of Organization
Under the Old LLC Law, an organizer forms an LLC by filing articles of organization with DFI. DFI’s articles of organization form requires specific information and does not allow for modification. The New LLC Law still requires the submission of articles of organization to DFI containing required information, but allows the organizer to submit additional information as well. The new articles of organization form is not yet available from DFI.
The Old LLC Law required the articles of organization to specify whether the LLC is managed by its members or is managed by a manager. The New LLC Law does not require management to be stated in the articles of organization and, instead, provides that the operating agreement may state whether the LLC is member-managed or manager-managed. If the operating agreement does not specify the management, the LLC is member-managed.
The primary benefit of this change is that an LLC will not be required to amend its articles of organization to change the way it is managed. However, third parties dealing with LLCs will no longer be able to look to the publicly available articles of organization to determine who manages the LLC. Instead, the third party will need to look at the operating agreement which is not a public document. As discussed below, the New LLC Law also gives the LLC the option to file a statement of authority with DFI specifying who is authorized to act on behalf of the LLC and the scope of that authority. The statement of authority form is not yet available from DFI.
Operating Agreement
Except as limited or preempted by law, an operating agreement supplies the rules for an LLC. Under the Old LLC Law, every operating agreement was required to be in writing. If an LLC did not have a written operating agreement, or the operating agreement did not supply all the necessary rules, the Old LLC Law provided the default rules for the LLC.
Under the New LLC Law, an operating agreement can be written, oral, or implied, or it can be a combination of all three. That said, there are some rules that can only be created by a written operating agreement. For instance, a written operating agreement can set forth the standard for judging whether a member is acting in good faith and dealing fairly with the LLC; such a standard cannot be created by oral agreement or by implication.
The New LLC Law does not require the operating agreement to be called an operating agreement. Accordingly, the rules governing an LLC might be found in multiple written sources, perhaps even email or text communications between members. The New LLC Law will also supply default rules if the operating agreement does not, and establishes rules that cannot be changed with an operating agreement.
The New LLC Law appears to create an opportunity for confusion regarding what rules govern an LLC. For managers and members of LLCs who want to have a definitive source of the rules governing their LLC, consideration should be given to including an “integration clause” in the written operating agreement. Such a clause could establish that the written operating agreement is the exclusive source of the LLC’s rules (aside from the New LLC Law) and that the rules can only be amended by amending the operating agreement in writing.
Agency of Members and Managers
Under the Old LLC Law, an LLC can either be member-managed or manager-managed. Managers are the agents of the LLC, meaning their actions can bind the company in transactions. When an LLC is member-managed, subject to certain exceptions, each member is an agent with the ability to bind the LLC. Although the scope of a manager or member’s authority can be stated and limited in the operating agreement, third parties may be entitled to rely upon the “apparent” authority of a manager or member even if their acts are not authorized.
The New LLC Law does not treat members as having authority to bind the LLC simply because they are members. Accordingly, a third party may not be entitled to assume a member has the authority to act for the LLC. Instead, an LLC may file a statement of authority with DFI that identifies which positions or specific people can bind the LLC. This statement also can identify the limitations of authority of certain positions or specific people within the LLC. Presumably, the statement also can be used to publicly identify the LLC as member-managed or manager-managed.
Duties of Members and Managers
The Old LLC Law imposes certain duties on members and managers; however, these duties were comparatively limited and were not defined in detail. Many duties could be waived by the members in the written operating agreement.
The New LLC Law is more explicit and detailed regarding the duties of members and managers to the LLC and to each other. The New LLC Law states that a member of a member-managed LLC has a fiduciary duty of loyalty and care and an obligation of good faith and fair dealing. A member does not have a duty of loyalty or care in a manager-managed LLC but still has the obligation of good faith and fair dealing. Likewise, the managers of a manager-managed LLC have a duty of loyalty, care and an obligation of good faith and fair dealing, and these duties are more extensive than a member’s duty in a member-managed LLC. The New LLC Law establishes some limitations on the ability to modify these duties in an operating agreement or otherwise. However, the New LLC Law also provides mechanisms for authorizing and ratifying activities that would otherwise violate a member’s duties as well as, within certain limits, altering and eliminating duties and restricting remedies for breaches of those duties.
LLCs whose members have complex and competing business interests that might implicate their fiduciary duties to one another under the New LLC Law might consider opting out of the New LLC Law in favor of the less restrictive Old LLC Law. However, an opt out may be unnecessary if their operating agreement adequately addresses the competing interests and waives breaches of fiduciary duties or if the New LLC Law can accommodate their business relationships.
Members Without Transferrable Interest
The New LLC Law recognizes a class of member that does not make a contribution to the LLC or acquire a transferrable interest. This change creates a form of LLC that can operate like a non-stock corporation, for instance, for non-profit purposes.
Requests for Information
The Old LLC Law permitted members to inspect and copy LLC documents that were relevant to the members upon request. The Old LLC Law permitted access to be curtailed by the operating Agreement. The New LLC Law expands the members’ access to information. A member is entitled to request materials beyond those that directly impact the member’s rights and duties. The operating agreement cannot unreasonably restrict such access under the New LLC Law.
Derivative Claims
As a result of recent Wisconsin Supreme Court decisions, members of LLCs under the Old LLC Law had the ability to bring direct actions against each other for matters relating to injuries to the LLC. This is very different than the rights of shareholders in a corporation, who are often limited to bringing a derivative action on behalf of the corporation, which is much more difficult to do. The New LLC Law mirrors the corporate derivative action law and imposes more restrictions and requirements on members who wish to sue for injuries to the LLC.
Conclusion
These are just some of the changes coming into effect in 2023 for Wisconsin LLCs, but they are by no means the only changes. For instance, the new law also has changes in how an LLC is merged or dissolved and wound up among other changes. Preexisting LLCs who are concerned about operating under the New LLC Law should contact an attorney to see if opting out of the new law makes sense for their business.
If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.com or (608) 257-2281 or your Stroud attorney.
DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice. This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship. You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.