Effective January 1, 2023, business entity law changes are coming for limited liability companies (LLCs) in Wisconsin. Governor Tony Evers recently signed 2021 Act 258, which adopts a more standard set of LLC laws similar to those LLC laws already used by 23 other states. Act 258 is a step towards the modernization of Wisconsin’s business entity laws.
Wisconsin’s current LLC laws have only a handful of cases to provide business owners guidance on their interpretation by the courts. Since the Act brings Wisconsin’s LLC laws in line with many other states, there will now be hundreds of cases from jurisdictions across the country to rely upon when interpreting them. Act 258 will therefore give business owners more certainty and predictability in how their business will be governed under Wisconsin law, while continuing to provide the flexibility of an LLC structure.
The important changes you need to know:
- LLCs may now file a Statement of Authority to publicly identify the authority (or lack thereof) of a member. Currently, a person or entity who is a member of an LLC may have “apparent authority” to act on behalf of the LLC (such as by signing contracts that bind the LLC to certain obligations), even if they haven’t been expressly granted authority by the LLC. Act 258 removes this concept and does not give members authority just because they are members.
- As of January 1, 2023, the LLC can file a Statement of Authority (or a Statement of Denial of Authority) with the Wisconsin Department of Financial Institutions (DFI) to publicly say who has authority to act on behalf of the LLC. This document can be accessed by third parties who want to verify whether a member has authority to act on behalf of the LLC.
- An LLC may now have both economic and non-economic members. Under Act 258, persons can become LLC members without acquiring a transferrable interest in the LLC or having to make a monetary contribution. This is particularly helpful for the use of LLCs as non-profit charitable organizations (similar to non-stock corporations).
- If an LLC is taxed as a partnership, the value of a member’s contributions will now be based on their partnership capital account rather than just their initial contribution. For LLC members this means that the value of their contributions will now be based on how much they have contributed into the LLC over time, rather than just what they put in at the beginning.
- Capital accounts for tax purposes are the most current and accurate measure of the value of the contributions a member has made to the LLC, and any distribution from the LLC will be made proportionally based on the value of such capital account.
- The voting power of membership interests will now also be proportional to a member’s capital account. If the members do not intend for the value of the capital accounts to control management of the LLC, the members will need to document this in the LLC’s operating agreement.
- An operating agreement may now set forth standards to determine when a member has breached their fiduciary or contractual duties to the other members. Under Act 258, the default rule is that members and managers owe the LLC and its other members and managers, if any, the fiduciary duties of loyalty and care. A member must discharge these duties consistent with a member’s contractual obligation of good faith and fair dealing, which obligation and remedies cannot be eliminated, but the LLC’s written operating agreement can define how this obligation is measured.
- Generally, the duties of loyalty and care cannot be removed; however, the LLC’s written operating agreement can set forth certain standards by which a violation of or performance of a duty can be measured. If your operating agreement was validly existing before January 1, 2023, and it waived some or all of these duties, it will not be affected by this rule.
- An operating agreement may now include oral or implied agreements. An operating agreement can now include agreements that are either oral or implied. This means that if you do not have a written operating agreement, an agreement may exist based on conversations, emails, or text messages between members.
- We recommend every LLC have a written operating agreement that all members sign, because, without a singular written operating agreement to control the management and business of an LLC, those conversations, emails, and text messages between members will very likely lead to uncertainty and member disputes.
- In a single-member LLC, a creditor of the sole member can now foreclose on the LLC membership interest of the member and remove the member from the LLC. If the sole member of a single-member LLC is in default on a personal loan of some kind, their creditor can now foreclose on the member’s membership interest in the LLC. Under the current law, the creditor can obtain a charging order lien on the economic part of the member’s interest, which could give them the right to garnish distributions.
- Act 258 provides that the creditor has the authority to take over the entire company by foreclosure of a charging order lien. This means the member could be removed from the LLC entirely, leaving the creditor as the only member. This is not applicable to multi-member LLCs.
- A member’s dissociation in violation of an LLC’s operating agreement is statutorily defined as “wrongful”. If a member of an LLC withdraws from the LLC in a manner that violates the LLC’s operating agreement, the member’s withdrawal is defined as “wrongful.” The Act also permits the LLC or a member of the LLC to seek a judicial order for another member’s expulsion from the LLC when a member commits certain acts.
- An LLC’s articles of organization no longer need to define the LLC’s management. The articles of organization for an LLC (the document that establishes the LLC with the DFI) no longer needs to state whether the LLC will be managed by its members or by a manager. Under Act 258, the management structure can be solely defined in the LLC’s operating agreement.
- Further, LLCs now have more freedom to include other details in the articles of organization that they could not before – for example, now the articles of organization can include the purpose of the LLC, which had not been allowed previously.
How and when to take action:
The Act 258 will apply to all LLCs beginning January 1, 2023. However, existing LLCs can take action now by either:
(1) “opting in” to the new rules early by filing a Statement of Applicability (available here) with the DFI; or
(2) “opting out” of the new rules entirely by filing a Statement of Nonapplicability (available here) with the DFI no later than December 31, 2022. If you choose to file a Statement of Nonapplicability now, you may still choose to file a Statement of Applicability later on.
If an existing LLC takes no action before January 1, 2023, it will be automatically subject to the Act. Importantly, any provisions of an operating agreement that were valid and in effect before 2023 will remain valid.
McCarty’s business and corporate law attorneys are experienced in helping businesses establish and maintain LLCs. If you have any questions about Act 258, filing a Statement of Applicability or Nonapplicability, or any other matters related to your LLC, please contact us.