Dupont
On Jan. 1, Wisconsin’s Limited Liability Company laws changed as a result of Gov. Tony Evers signing Act 258. These new laws originate from a set of uniform laws drafted by the Uniform Law Commission; they encourage consistency in the treatment of LLCs across the U.S. and bring Wisconsin closer in line with nearly two dozen other states. This uniformity and consistency provides business owners with a better idea how their LLCs will be governed under Wisconsin law.
For some LLCs, there is a good chance the new laws went into effect without anyone realizing it. So, what does this mean for LLCs in Wisconsin, and are there any downsides of these new laws?
Operating agreements no longer need to be written documents
In Wisconsin, prior to Act 258 taking effect, an operating agreement had to be written. Now LLC operating agreements can be either oral or implied. This means if you do not have a written operating agreement, an agreement is likely inevitable to exist based on conversations, emails or text messages between LLC members.
The downside of this change is that amendments can be made to operating agreements without all members realizing it. If a member proposes a change to an operating agreement during a conversation and there seems to be a consensus, that consensus could be enforced as an amendment, even if a member intended otherwise. That’s why, to eliminate confusion, a written operating agreement signed by all members is recommended. It should include a provision that requires all amendments be in writing, signed by all members and with all amendments being clearly identified as amendments.
A member’s contributions now determine their ownership percentages
Prior to Act 258, it was up to an operating agreement to define how voting rights and rights to distributions were divvied up. With Act 258 in place, the default rule is now that voting rights and rights to distributions must be proportionate to a member’s capital account. This change will only affect multi-member LLCs.
A member’s capital account is the most accurate source for determining their contributions to the LLC. However, because of the potential for constant fluctuation and inconsistent treatment of loans to or from the LLC, it is recommended that LLCs clearly state in the operating agreement how they want voting rights and rights to distributions to be determined. For most, the intent of all the members will be to define those rights in advance by specifying ownership percentages, as well as specifying that those percentages will not be modified unless the members amend the operating agreement.
LLCs can file a statement of authority to publicly identify the authority of a member
Under the old laws, a person or entity who was a member of an LLC could have apparent authority to act on its behalf. An example of this would include signing contracts binding the LLC to certain commitments. Act 258 removes the concept of apparent authority and expressly states that members do not have such authority just because they are members.
As such, the LLC may want to file a Statement of Authority or a Statement of Denial of Authority with the Wisconsin Department of Financial Institutions to publicly say who can act on the LLC’s behalf.
Members now owe explicit fiduciary duties to each other
LLC members have always owed each other the fiduciary duties of loyalty and care, but under Act 258 those duties are now written into the statutes. In a manager-managed LLC, these duties are owed by the manager(s).
Generally, the duties of loyalty and care cannot be waived. However, an operating agreement can lay out certain standards and describe certain acts that are authorized by all members despite potentially appearing to violate the duty. The duty of loyalty forbids a member from competing with the business of the LLC. So, in a situation where a group of investors come together to purchase an office building, it would be important that the operating agreement between those investors acknowledges and authorizes the investors to invest in other real estate projects (even other office buildings, potentially) as that might otherwise be seen as a violation of the duty of loyalty.
If your LLC’s operating agreement validly existed before Jan. 1, 2023, and it waived some or all of these duties, it will not be affected by this rule.
Creditors of sole members can now foreclose on charging order liens
Prior to Act 258, in a single-member LLC, if a personal creditor of the sole member was able to obtain a charging order lien, then the creditor had a right to garnish distributions to recover the debt owed over time. After Act 258, that creditor can attempt to foreclose on the charging order lien, earning a right to more than just distributions. The creditor would effectively take over as the sole member and could liquidate and dissolve the entire business. This does not apply to multi-member LLCs.
Other noteworthy changes
- If a member of an LLC withdraws in a way that violates the operating agreement, the member’s withdrawal is defined as “wrongful.” This means the LLC can seek damages.
- The articles of organization no longer need to state if the LLC is managed by its members or a manager. The structure can be solely defined in the operating agreement.
- An LLC can have both economic and non-economic members. This means people can become members without acquiring transferrable interest or having to make monetary contributions.
- Under the new default rule, any member can make a request for any company information, even if it is unrelated to the member’s rights and duties. Further, the LLC must provide, without request by the member, any information that is material to the member’s rights and duties. Operating agreements can create reasonable restrictions on this right.
Sadie Dupont, who first joined McCarty as a law clerk while finishing her law degree at Marquette University, began practicing with the firm in May 2022. Her practice is focused primarily on business law and real estate. She also holds an MBA from Marquette.
