CLIENT ALERT: Wisconsin’s New LLC Law, Part 1
By: Attorney James A. Spella, Schloemer Law Firm, S.C.
Following a decade of work by Wisconsin business attorneys, Wisconsin has recently taken steps to modernize its business laws by adopting the Revised Uniform Limited Liability Company (LLC) Act and the Revised Uniform Limited Partnership (LP) Act, with modifications. Not all change is good, however. Wisconsin business owners should be aware of these changes and how the new laws may affect their LLC ownership and operations. As an initial step, we recommend reviewing and updating all LLC Operating Agreements.
NEW WISCONSIN BUSINESS LAWS: EFFECTIVE DATE
On April 15, 2022, Wisconsin enacted ‘2021 WISCONSIN ACT 258’. This Act made significant revisions to Wisconsin business statutes including a complete amendment and restatement of Chapter179 – the Uniform Limited Partnership Law, and Chapter 183 – the Uniform Limited Liability Company Law.
The new Chapters become effective on January 1, 2023, for all LLCs and LLPs formed on or after January 1, 2023.
As to existing LLCs and LPs, they are given the opportunity to be subject to the new chapters prior to January 1, 2023, by a filing with the Department of Financial Institutions.
As to existing LLCs and LPs that choose not to be subject to the new Chapters, they can ‘opt out’ by a filing with the Department of Financial Institutions no later than December 31, 2022.
WISCONSIN LLC OPERATING AGREEMENTS
New Law: Definitions
Prior to the new Act, Chapter 183, the definition of an ‘operating agreement’ was:
“…….an agreement in writing, if any, among all of the members as to the conduct of the business of a limited liability company and its relationship with its members”.
If there was not an operating agreement, the provisions of Chapter 183 controlled.
Under the new Act, the Chapter 183 definition of an ‘operating agreement’ is:
“the agreement, whether or not referred to as an operating agreement and whether oral, implied, in a record, or in any combination thereof, of all of the members of a limited liability company, including a sole member, concerning the matters described in s. 183.0105 (1). The term includes agreement as amended or restated.”
Note: s. 183.0105 (1) of the Act is entitled “Operating agreement: scope, function and limitations” and generally describes the matters that you would anticipate an operating agreement to address.
Under the Act, the Chapter 183 definition of a “Written operating agreement is:
“an operating agreement, or part thereof, that is set forth in a record”.
Under the Act, the Chapter 183 definition of a “Record” is:
“information that is inscribed on a tangible medium or is stored in an electronic or other medium and is retrievable in perceivable form”.
So much for definitions. What does this mean if you have an LLC or will organize one in the future and do not opt out of the Act?
- Without a “written operating agreement”, your operating agreement and the understandings you have with your other members will be determined by implied understandings, conversations, emails, writings, or a combination thereof. This would include understandings as to restrictions on ownership, governance matters including who can act on behalf of the LLC, trigger events for buyout, and purchase price and payment terms for a membership interest.
- Without a “written operating agreement” there is the increased likelihood that one member’s understanding will be different than other members’ understandings, leading to unnecessary uncertainty and perhaps disputes.
Planning Considerations for Existing Wisconsin LLCs & New LLCs
We recommend all existing LLCs, and new LLCs that will be formed in the future:
- Have a written ‘Operating Agreement’.
- The written operating agreement should be signed by all of the members.
- The written operating agreement would contain those customary provisions for governance, membership interest restrictions, and events of disassociation.
- The written operating agreement shall have a provision that eliminates any other oral or written understandings by including an ‘Integration Clause’, for example:
“This Operating Agreement contains the entire agreement between the parties hereto and supersedes any and all prior written and/or oral agreements. This Agreement may be altered or modified only in a writing signed by the parties hereto.”
- Consider organizing a corporation and then elect to be taxed as an “S” Corporation providing for pass through income tax reporting.
Summary: Recommendations for Wisconsin Business Owners
The importance of Members of an LLC to address the ‘operating agreement’ default definition of 183 needs to be considered by every non-spousal multi-member LLC. Certainty in relationships among the Members is critical to the success of the LLC. The open-ended approach to rely on an ‘operating agreement’ and not a ‘written operating agreement’ impairs this certainty.
If you are interested in reviewing your LLCs governing documents or would like to establish an LLC, call our office at 262-334-3471 to schedule an appointment with one of our Business Law Attorneys.
Originally published: June 6, 2022
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Disclaimer: The information contained in this post is for general informational purposes only and is not legal advice. Due to the rapidly changing nature of law, Schloemer Law Firm makes no warranty or guarantee concerning the accuracy or completeness of this content. You should consult with an attorney to review the current status of the law and how it applies to your unique circumstances before deciding to take—or refrain from taking—any action. If you need legal guidance, please contact us at 262-334-3471 or [email protected]