A new law governing business entities in Wisconsin goes into effect on Jan. 1, 2023, and it should have a positive impact on the way limited liability companies (LLCs) govern themselves, according to business and family-law attorneys.
Under the new law, Chapter 183 governing LLCs organized under Wisconsin law was completely removed and replaced with a new statute based on the Revised Uniform Limited Liability Company Act, which has been adopted by other states. The new law, Wisconsin Act 258, gives existing LLCs until Jan. 1 to opt in or opt out of the new statute, and it creates opportunities for Wisconsin family-owned businesses, especially LLCs, to revamp their governance, ownership, and succession structures.
Attorneys say the new statute provides more clarity on which legally recognized fiduciary duties can be waived in an operating agreement, but a key part of its flexibility is an opt-in provision. There is a form on the Wisconsin Department of Financial Institution’s website, and it allows the managers of an existing LLC to select whether they want to be governed by the existing act rather than the new act.
Nadelle Grossman, professor of law and associate dean for academic affairs at Marquette University Law School, was on the drafting committee for the LLC statute, and she notes that the way the new law was enacted, it will be effective on Jan. 1 by default. “Specifically, it will be effective for any new entity formed after the new year,” Grossman notes. “For existing entities, they can actually file a statement of non-applicability.”
Alternatively, an LLC could indicate that it wants to be governed by the new law earlier than Jan. 1, and it can file a statement of applicability stating that desire.
Doing their duty
Just what are business managers opting in or out of? What the state Legislature did in modernizing the business entities statute is not only make changes to all five business entities (general partnerships, limited partnerships, business corporations, nonstock corporations, and limited liability companies), it provided more clarity around the duty issue that arose in Marx v. Morris. In this case, the Wisconsin Supreme Court ruled that members of an LLC have standing to make claims against another member of the LLC as individuals, not on behalf of the LLC.
According to Greg Monday, a family business attorney and shareholder in the Madison office of Reinhart Boerner Van Deuren, the old Wisconsin business entities law was unclear about what the potential duties were. There was a short list four things managing members or managers could do to incur personal liability — commit a crime, engage in willful misconduct, derive an unfair benefit out of a transaction involving the company, and fail to deal fairly with the company — but it was easy to see that there were other questionable behaviors that weren’t covered by the old statute, Monday notes.
For years, attorneys wondered whether those four duties were the only duties that a managing member had to fulfill, but then came Marx v. Morris. “The majority decision said there are all kinds of potential claims we could imagine by all kinds of people affiliated with an LLC, and we’re not going to rule out any of them,” Monday says. “We’re not going to say that any of these people involved, or their affiliated parties, won’t have those claims. The justices sent it back down to the trial court but without a lot of specific direction.”
With lingering questions about whether plaintiffs could move forward with certain claims, the Wisconsin Legislature had to step in with additional guidance. Monday refers to the new statute, signed into law earlier this year by Gov. Tony Evers, as the “platinum package” of LLC statutes because Wisconsin law went from a bare bones statute to something that specifies which duties can be waived by a written operating agreement, which duties can’t be waived but can be modified, clarified, or limited by a written operating agreement, and which duties cannot be waived under any circumstances.
“I think that’s really helpful because it lays out almost a checklist of things that any business partners coming together to operate a co-venture should be talking about, and particularly within a family,” Monday says. “What you’re saying is the investors cannot bring a case against the managers of the LLC for breaches of those other duties because they are all being waived, and then they are told, and sometimes it’s in big capital letters, you’re waiving all of these potential claims that you would have.”
Under the statute, an LLC can be managed by managers or by members. The statute articulates duties that the people who manage the entity owe to the entity and the other owners (i.e., the members). Three categories of duties — good faith and fair dealing, loyalty, and care — each come with rules and permissible limitations that can be included in an operating agreement.
Some people feel that this is the best way to set up the LLC and investment, Monday adds, to preclude investor lawsuits that can be a means of harassing the other owners or directors, or filed because they are disappointed in results that were never promised but simply projected.
According to Grossman, one objective was to have Wisconsin’s law be more consistent with the Uniform Act governing business entities, which was established by the Uniform Law Commission and then tailored by individual states according to their specific needs. “We can expand the scope of cases that a practitioner would be able to look at in deciding how certain provisions operate,” Grossman explains. “So, it brings more depth of case law to look into when advising clients.
“There is a lot of freedom to modify the duties in an operating agreement,” she adds. “For most of these, they need to be modified in a written operating agreement.”
Corporate benefit
The law could also affect corporations in Wisconsin, but the effect should be positive, Monday says. Under the law, corporations will be able to require that all shareholder lawsuits involving a Wisconsin corporation should be adjudicated in a state or federal court in the state of Wisconsin. “So, that’s a nice thing that Wisconsin corporations might want to adopt,” he states.
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