State’s LLC law needs overhaul

In the nearly two decades since enactment of Wisconsin’s Limited Liability Company law, there have been many advancements in how limited liability companies (LLCs) are used.

LLCs are now the overwhelming choice of business entity in Wisconsin. In 2012, of the over 32,000 new business entities created in Wisconsin, over 28,000 were LLCs. This dwarfs by about 10 to 1 the next most common Wisconsin business entity.

The time for overhauling Wisconsin’s LLC law is overdue. A subcommittee appointed by the Wisconsin State Bar Business Law Section is in the process of proposing legislation by which Wisconsin will consider adopting a modified form of the Revised Uniform Limited Liability Company Act (“RULLCA”) drafted by the National Conference of Commissioners on Uniform State Laws.

For the most part, the proposed legislation will follow RULLCA. There are some areas where modification was appropriate such as the rules regarding contributions and distributions, procedural aspects for filings with the Wisconsin Department of Financial Institutions, and where provisions of RULLCA were modified to avoid unnecessary disruption to Wisconsin business practices.

One area of departure from current law, which defines an operating agreement to include only “an agreement in writing” (see Wis. Stat. § 183.0102(16)), is the new law will expressly allow an operating agreement to include any agreement “whether oral, in a record, implied or any combination thereof” (proposed § 183.0102(13)). While the rules for what is an operating agreement have been relaxed to include oral statements and emails, prudent business people will continue to have written operating agreements as they do today as a necessary part of proper business practice so the limited liability aspect of an LLC is respected.

The proposed law will also permit members to include in a written operating agreement provisions that eliminate or limit a member’s or manager’s fiduciary and other liability to the LLC and its members. In a provision that will be welcomed by Wisconsin’s venture capital community, an LLC’s articles will be permitted to include an area for additional terms. The purpose is to permit members to modify, restrict or limit management and capitalization of an LLC so to require an amendment to the LLC’s articles to change the rights and obligations described in the articles. There will also be a modification of the “charging order” provisions (which is a process for a creditor to obtain a lien on distributions on a member’s LLC interest), including a statutory remedy for how a creditor can access assets in a single-member LLC.

It is expected the legislation will be enacted in spring 2014 with an effective date of January 2015 or January 2016 to permit businesses to adapt to the new law.

Richard Latta is an attorney in Milwaukee.

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