Wisconsin Enacts New LLC Statute
Article By: Ian Colby of Ruder Ware
Wisconsin recently enacted a new law to govern the affairs of LLCs formed or doing business in Wisconsin. The old chapter of Wisconsin statutes governing LLCs (Chapter 183) was completely replaced by a new chapter (conveniently, also named Chapter 183). As a result of its complete replacement, there are numerous language changes, with differing legal effects. However, the broad conceptual structure of the LLC statutes remains the same. You can still use your experience and knowledge in most circumstances, but there are a few "gotchas" if you don't pay attention to the language of the new laws. In an attempt at brevity, below please find the five top changes of the new LLC act that you should know about:
Whose Law Is It Anyway?
- The new law includes a "transition" section that allowed existing LLCs to choose which law (new vs. old) that they wanted to follow.
- LLCs needed to file a Statement of Nonapplicability between April 15, 2022 and January 1, 2023 to be governed by old law instead of new law.
- If LLC hasn't filed a Statement of Nonapplicability by January 1, 2023, they're governed by the new law. Period. No take backs.
- There is no expiration on the election to be governed by the old law. Twenty years from now, in 2043, the LLC could still be using the LLC law in effect back in December 2019.
- Narrator: the remainder of the Top 5 only applies to LLCs created or organized under the new law.
Get It in Writing
- The new law redefines what counts as an "operating agreement" for an LLC. No longer must an operating agreement be in writing to be effective. (What?!?!)
- The biggest change under the new law is that the new law states that an operating agreement could be "oral" or "implied." To me, this is the most illogical and controversial part of the new law - basically, it is asking for future litigation as to the effectiveness of an operating "agreement."
- The easiest way to verify that your LLC isn't going to change the management or economic structure on you is to make sure your LLC's operating agreement contains an "Entire Agreement" clause. An entire agreement clause functions to limit how the LLC owners can change the operating agreement. It should state:
- (1) every agreement between the members regarding how the LLC will be run is contained within the written operating agreement,
- (2) no other agreements on the LLCs operations have been or will be made outside the written operating agreement, and
- (3) any change(s) to that operating agreement must be made in writing and attached to the written operating agreement.
On What Authority?!
- The old LLC law stated that any member of the LLC could be considered to have authority to transact business for the LLC. This protected third parties relying on a member's statements that they can transact for LLC, even if the member didn't have that authority.
- However, the new law flips that presumption: under the new law no member has authority to transact business with third-parties just because they are a member.
- However, the new law does allow for a "Statement of Authority" to be filed with the Wisconsin Department of Financial Institutions (WDFI), which is basically a public record of who can act on behalf of an LLC without needing separate signed resolution or document. A filed Statement of Authority is good for five years.
- The new law also allows a "Statement of Denial" that basically says "this person does not have authority to act on behalf of this LLC."
Let Me See The Manager
- The new law no longer requires that the LLC state whether it is "manager-managed" or "member-managed" in the Articles of Organization filed with the WDFI.
- However, the new law requires that, if the LLC will be manager-managed, that MUST be stated in a written operating agreement.
Floating the Voting
- Under the new law, the management rights in an LLC can fluctuate.
- The old law was predicated on member votes being based on the initial capital contribution of a member.
- The new law says, if an LLC is taxed as a partnership, the voting power of each member follows each member's capital account kept for tax purposes. What does this mean?? If one member's capital account rises (or decreases), said member now has more (or less) voting power.
- An LLCs operating agreement can change this default (written or not).
Conceptually, LLCs remain the same under the new Wisconsin LLC law. An LLC is a business entity that can be flexibly structured, maintain limited liability for its members, and can avoid double-taxation. However, it would behoove any LLC or its members to take note of the new LLC statute and make sure that going forward, the LLC operates as its members intend it to operate.
Ian Colby, an attorney with Ruder Ware, focuses his practice on business and real estate, including general corporate services and transactional work, real estate development, leasing, land use, mergers and acquisitions, and business entity formation. For more information, contact Ian at 800-477-8050 or email firstname.lastname@example.org.