LLC Operating Agreements under the New Minnesota LLC Act

Since Minnesota adopted the Revised Uniform Limited Liability Act (“RULLCA” or “new LLC Act”), which took effect on August 1, 2015, the way we create and structure limited liability companies in Minnesota has shifted from a corporate law model to a partnership law approach. This change means the way we manage LLCs has been simplified.

For LLCs formed prior to the new laws, you may have multiple documents which govern and manage your business operations. Under the new LLC Act these documents are consolidated into the foundational document called an operating agreement, making it easier for you to manage your business entity.

What is an operating agreement?

Under the new LLC Act, an operating agreement is the fundamental document, which can be oral, written, implied by conduct or course of dealing, which governs the following activities:

1. The relationships between the owners themselves and between the owners and the LLC;
2. The rights and responsibilities of those who manage the LLC;
3. The LLC’s activities and how those activities are conducted; and
4. The process to make changes to the operating agreement.

Why should you have an operating agreement?

            Operating agreements are not required to be written, and may be oral, implied by conduct, or course of dealing. However, here are some reasons why you should have a well-drafted and comprehensive agreement that is tailored to your business:

1. Clearly defines the roles and responsibilities each owner or manager has within the business so everyone is moving towards a common goal.
2. Minimizes potential disputes that could disrupt your business operations
3. Provides a plan for unforeseen circumstances creating business continuity and succession.

Here are some key provisions your LLC’s operating agreement should cover and address:

1. Owner contribution: What type of contributions will owners make to the LLC?
2. Financial rights: What types of rights will owners receive in exchange for such contributions?
3. Profit/Losses: How will profit and losses be shared and distributions made?
4. Tax election: How will the LLC be taxed?
5. Management: How and who will manage the LLC?
6. Authority: Who has the power to bind the LLC to contracts?
7. Exit strategies: What happens in the event one of the owners voluntarily leaves the LLC?
8. Transfers/Buy-sell: What happens in the event of a death, disability, divorce, bankruptcy of an owner of the LLC?
9. Dispute Resolution: How will disputes between owners be resolved?
10. Dissolution: What actions cause the LLC to end, and how will management handle the ‘winding up’ process?

DISCLAIMER:   The information contained in this article is for informational purposes only and does not constitute legal advice nor does the transmission of this information intend to create an attorney-client relationship between sender and receiver.  Please be advised not to act or rely on any information in this article without first seeking legal counsel. For more information, please contact Encompass Law, PLLC.