Modernizing Wisconsin’s business entity laws

The Business News Staff

Staff

November 16, 2022

WISCONSIN – Greater uniformity for companies throughout Wisconsin – Wisconsin attorney Adam Tutaj said that is the intention of the new limited liability company (LLC) law, which goes into effect Jan. 1, 2023.

Tutaj said an LLC is a business structure that offers limited liability protection.

As with corporations, he said an LLC legally exists as a separate entity from its owners – therefore, owners cannot typically be held personally responsible for the business debts and liabilities.

Tutaj said the new LLC law will completely replace the existing LLC chapter in the Wisconsin statutes with a version of the Revised Uniform Limited Liability Company Act.

“Our LLC statute was kind of a homegrown statute that was created back in 1993, and there wasn’t really much of a uniform law back then,” he said.

How we got here
Tutaj said the change was prompted by Gov. Tony Evers’s signing of Act 258, which adopts a more standard set of LLC laws similar to those already used by more than 20 other states – including Delaware which he said is often seen as “the forefront in terms of modernization of LLC law because they amend their laws frequently.”

Sadie Dupont, a business and corporate law attorney at McCarty Law LLP located in Appleton, said Act 258 is a step toward the modernization of Wisconsin’s business entity laws.

Tutaj – a member of the State Bar of Wisconsin’s Business Law Section Board of Directors who co-chaired the committee on LLCs in connection with the business entity legislation package – said there are many positives to the new law.

“We think these are all very good innovations, and we were pretty careful to make sure that important existing mechanics are retained,” he said.

Potentially the biggest upside, Dupont and Tutaj said centers around increased access to court interpretation.

“Wisconsin’s current LLC laws have only a handful of cases to provide business owners guidance on their interpretation by the courts,” she said. “Since Act 258 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.”

Dupont said the new law gives 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.

“In Wisconsin right now, we’ve had our statute for about 30 years, but there are probably only about four or five cases that actually explain what some provisions should be applied in certain settings,” Tutaj said.

One of the benefits of a uniform law, he said, is that when multiple states have basically the same language, people can look around and see what other states are doing.

“It can become persuasive authority and might help eliminate confusion down the road,” he said. “If you’re a lawyer working with clients, and you’re trying to figure out what a particular provision might mean, or how it might be applied, you might not find any cases in Wisconsin. But if you find that out of the 22 other states that looked at it, you know, 20 of them have had decisions and they all come down the same way, you can avoid a lot of headache.”

Tutaj said getting here has been a long, multi-year process, but has included “a lot of very careful study of what also needs to be retained.”

Adam Tutaj

“Whenever we adopt these uniform laws, especially when we have a 30-year history, we kind of start with the approach of first do no harm right,” he said. “We don’t want to mess anything up that’s of significant importance here.”

A change that Tutaj said has probably been ready for adoption for a while, also needed to make its way through the legislative process.

“The way the Legislature works, there are only certain windows that you can kind of consider bills,” he said. “It finally got there and with bipartisan support, we’re pleased to announce. And even though you got a Democratic governor and a Republican-controlled Legislature, I think everybody looked at this and said, ‘Yeah, this is just good business.’”

Here are a handful of the changes prompted by the law change:

Creation process
Tutaj said the ease of the LLC creation process in the state will remain in place.

“LLCs are very easy to form,” he said. “You can go online and basically there are a few fields to fill, so creating the entity itself is very easy. And we’ve kept that.”

Tutaj said those LLCs that would like to create their own articles of incorporation or include more intricate details will again have that option to do so.

“You haven’t had that option since about 2003 when we moved to this online model – when you got six fields and that was it,” he said. “Now you can create your own if you want.”

Operational agreements
Tutaj said what he sees as potentially the most innovative aspect of the new law is the changes to operational agreements.

“Under current law, the old law, you didn’t have to have an operating agreement, but if you did, the only operating agreement respected were if they were in writing – that was the definition of an operating agreement,” he said. “If it wasn’t in writing, you didn’t have an operating agreement.”

Tutaj said that meant that certain statutory defaults would apply.

“Even though there may have been a course of dealing that everyone kind of relied on, it wasn’t automatic that that would be respected because the definition of operating agreement was writing only,” he said.

Dupont said under the new law, an operating agreement can now include agreements that are either oral or implied, which means that if you do not have a written operating agreement, an agreement may exist based on conversations, emails or text messages between members.

//s3.amazonaws.com/appforest_uf/f1668631344077x978252545533429200/richtext_content.webpSadie Dupont

“We’re tracking the example of all the other states essentially, which says, ‘Even if it’s not in writing, but you can prove it, we’re going to respect oral operating agreements, implied operating agreements… even if it’s not set forth in a written and signed agreement,” Tutaj said.

He said he sees this as an important change because LLCs are formed by “everyday people.”

“So many companies, they’re formed by people themselves,” Tutaj said. “They don’t get lawyers involved, and that makes perfect sense. We really wanted to revise the statute so there are fewer gotchas for people that are doing this on their own.”

Dupont said as a lawyer she does encourage LLCs to have a written operating agreement to squash any potential uncertainty.

Statement of Authority
Act 258 also eliminates the concept of “apparent authority,” and clarifies that a member is not an authority agent of an LLC solely by reason of being a member.?

Dupont said LLCs may now file a Statement of Authority to publicly identify the authority (or lack thereof) of a member.
“Under the new law… you can file a Statement of Authority with the Wisconsin Department of Financial Institutions (DFI) and that’s a publicly available document for the specified individual or the group of individuals that is allowed to act on behalf of the company,” she said.

Dupont said it also works in reverse.

“If you have an individual or specific person that you do not want (to act on behalf of the company), you can file a Statement of Denial of Authority,” she said.

Dupont said this document can be accessed by third parties who want to verify whether a member has the authority to act on behalf of the LLC.

Fiduciary duties
Under the old law, Dupont said LLC members and managers could agree to waive fiduciary duties owed to each other, which include the duty of care, the duty of loyalty and the imposed contractual obligations of good faith and fair dealing.

“The new law removes that option to waive or contract around duties,” she said. “Now they are statutorily required. The operating agreement can define certain situations in which that duty may or may not be broken, but that is a much smaller amount of autonomy in that sense.”

One of the changes Dupont said her firm is a bit concerned about is the change in how the value of a member’s contributions will now be based on their partnership capital account rather than just their initial contribution.

“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,” she said. “Usually, when you do that initial contribution, you agree in advance, it was 50/50 – you vote 50/50,” she said. “And just because I will have gone ahead and made a $5,000 loan with the company a year from now, that doesn’t mean that modifies my interest in getting the majority – that is now usually what the intent is. So, we are a little concerned about that.”

Member/manager designations
Dupont said the also doesn’t require a designation of whether the LLC is member-managed or manager-managed in the articles of organization.

She said this change thereby eliminates the need to amend the articles should members decide to change the form of management. 

“Under Act 258, the management structure can be solely defined in the LLC’s operating agreement,” she said.

Dupont said the articles of organization can now also include the purpose of the LLC, which had not been allowed previously.

Opting out
Existing LLCs have the option of “opting out” of the new law before the first of the year, which must be done by filing a Statement of Non-applicability through the Wisconsin DFI.

Tutaj said this is similar to the option corporations had when Wisconsin adopted unformed corporate law.

“This is the same mechanics that we used back in the ’80s when we adopted our uniform corporate law statute,” he said. “You can say, ‘On certain provisions, I want to opt-out of this.’”

Tutaj said it’s only certain provisions that wouldn’t apply – “basically things that relate to internal governance in the life of the organization.”

“Procedural matters that Wisconsin DFI creates, that applies no matter what,” he said.

Tutaj said one of the only reasons existing LLCs might want to opt out is if it is represented by council and already has a very detailed operating agreement in place and for conservative reasons might decide to opt-out.

“They might decide, ‘you know what, I don’t want to work my way through the whole law, and I don’t want to do anything differently, so I’m just going to opt out and minimize my headaches,’” he said.

Dupont said at this point, now that we’re nearing the end of the year, opting out is sort of a case-by-case determination.

“Unless there was an extenuating set of circumstances that warranted it, I would say an existing LLC shouldn’t concern themselves with the question of opting in or opting out,” she said, “unless they knew for sure that they did not want to be governed by some one of the new default rules. But a lot of it can be waived in operating agreements.”

LLCs also have the option to opt-in early.

Any existing LLCs that have not opted in early or opted out by Jan. 1, 2023, will be automatically subject to the new law.
If an existing LLC takes no action before January 1, 2023, it will be automatically subject to the Act.

Tutaj said any terms of an LLC’s operating agreement that were valid under the old law will remain valid under the new law.