Unlearn What You Have Learned: Wisconsin’s New LLC Law

October 25, 2022 | Business | Law Changes

In April 2022, Governor Evers Signed Wisconsin Act 258. This Act makes significant changes to the statutes for all forms of business entities – corporations, non-stock corporations, partnerships, limited partnerships and limited liability companies. This article will focus specifically on the changes to the limited liability company statutes; but it would be wise for all business entities to review their practices with an attorney to see how these changes affect their business.

The changes were made to bring Wisconsin current with the Revised Uniform Limited Liability Law. Twenty-three states have now passed this revised uniform law and, under the new statutes, how those states interpret the revised uniform law is relevant for Wisconsin and the other 22 states.

APPLICABILITY

The new Wisconsin LLC statutes take effect on January 1, 2023. If LLCs take no action between now and the effective date, the new statutes will apply by default for all obligations incurred after January 1, 2023. For obligations incurred prior to that date the current statutes (Chapter 183, 2019 Stats.) will apply. Additionally, all provisions of an operating agreement that are valid under the 2019 statutes shall continue to be valid and applicable to the extent allowed under the 2019 law.

However, any LLC formed prior to that date can choose to opt-out of the new law by filing a Statement of Non-Applicability with the Department of Financial Institutions (DFI). If an LLC chooses to opt-out then Wisconsin Chapter 183, 2019 Stats. will continue to govern the LLC. At any time after filing a Statement of Non-Applicability, an LLC can file a Statement of Applicability. Such a statement is irrevocable and the new Chapter 183, 2021-22 Stats will apply from the time the Statement of Applicability is filed.

Similarly, an LLC formed prior to January 1, 2023 can opt-in to the new law by filing a Statement of Applicability. If an LLC elects to file either Statement with DFI, it must be done in the same manner as amending the operating agreement. Generally, that means the filing of either Statement requires unanimous consent of all members of the LLC.

It is imperative that any LLC review the changes (some of which are discussed below) with its members prior to the LLC to determine if the LLC needs to file a Statement of Non-Applicability prior to January 1, 2023.

ARTICLES OF ORGANIZATION

This is the document that an LLC must file with DFI to be recognized as an LLC. Without the Articles of Organization, an LLC does not exist. Under the old statutes, the Articles of Organization were required to contain only certain information – no more, no less. Under the new statutes, Articles of Organization are more flexible. For instance, the old statute required an LLC to designate whether it was a member-managed LLC or a manager-managed LLC. Now, that choice is optional to include – although all LLCs are member-managed unless the LLC’s written operating agreement designates it as a manager-managed LLC.

Under the new law, the Articles of Organization may include information that is required or permitted to be set forth in a written operating agreement. In other words, an LLC can essentially draft its Operating Agreement into the Articles of Organization. Furthermore, an LLC can include definitions, limitations, and regulations on the powers of certain members and managers of the LLC.

OPERATING AGREEMENT

The Operating Agreement is an LLC’s governing document. Generally, an Operating Agreement will outline the relations among the members as well as between the members and the LLC, outline the rights and duties of the members and managers, and the activities and affairs of the company. Under the old law, an Operating Agreement had to be written. If there was no Operating Agreement, the old statutes governed the LLC.

Now, the new law allows an Operating Agreement to be oral, written, or implied, or a combination of all three. This means that an LLCs Operating Agreement may not be found in one place. There could be a written component. However, that written agreement may be amended or supplemented by an express oral agreement among the members or by an implied agreement based solely on the conduct of the members, without any express agreement.

However, there are now statutory restrictions on what an Operating Agreement is allowed to change from the statutes. This includes the duties a member owes to the LLC and the other members; exonerate members for conduct that is a willful failure to deal fairly with the LLC when a person has a material conflict of interest, criminal conduct, transactions in which a member derives an improper personal profit, or willful misconduct; alter the causes for judicial dissolution of the LLC; restrict a member’s ability to bring a lawsuit on behalf of the LLC; restrict the information and records required to be provided to members; and, several other provisions.

FIDUCIARY AND OTHER DUTIES

For the first time, the new LLC statutes impose statutory fiduciary duties of loyalty and care on members and managers (when applicable). It also imputes the contractual obligation of good faith and fair dealing with respect to the members/managers duties and obligations under the statutes and operating agreement. Finally, it seems the statutes also impose common law fiduciary duties on members and/or managers, although it is not explicitly stated. While the old statutes also imposed common law fiduciary duties.

The new statutes do allow for an LLC to alter or carve-out some exceptions to these duties in a written operating agreement. A written operating agreement may eliminate “any other fiduciary duty,” which is why it is inferred that the statutes impose the common law fiduciary duty – beyond the statutory duties – to LLCs and its members or managers.

DERIVATIVE ACTIONS

Under the old statutes, and case law related to those statutes, LLC members could bring a direct action in court – meaning in their individual name – against other members even if the LLC is the one that suffered the injury. In other words, if one member misappropriated funds from the LLC, another member could sue in his or her name to recover the misappropriated funds even though the funds belonged to the LLC and not the individual member. This is based on a decision of the Wisconsin Supreme Court in its interpretation of the old statutes. The Court justified its holding in the regard by, essentially, holding that the injury to the member and the LLC were one and the same since the income of the LLC passed through directly to the members for tax purposes.

However, the new statutes supersede the Court’s holding. Now, members may only bring a direct action in their name if the plead and prove a direct injury to them separate from any injury to the LLC. If the injury suffered is one by the LLC, then a member must bring a derivative action on behalf of the LLC instead of his or her own name. The new statutes outline the procedure for filing a derivate action on behalf of the LLC.

The new statutes also make changes regarding the requests and access that members have to the records of the LLC, the ability for members to act as agents for the LLC, the remedies available to an action for judicial dissolution based on fraudulent or oppressive conduct by one member against another, the process by which a member dissociates from the LLC (or foregoes his or her interest), how an LLC can merge with another entity, be acquired by another entity, or converted to a different business entity (i.e. from an LLC to a corporation).

If you have an interest in a Wisconsin LLC it is advisable to review these changes with an attorney and with your business partners as soon as possible, but at the very least prior to the end of the year, so that you and your partners may determine the best path forward for your business. If you need help, please contact Kramer, Elkins & Watt, LLC at info@kewlaw.com or 608-709-7115 for more information about the changes to the LLC law and how it might impact your business.