Chapter 183 of the Wisconsin Statutes, the law governing Wisconsin limited liability companies (LLCs), will take on a new look effective January 1, 2023. Wisconsin follows the lead of 20 other states in largely adopting the Revised Uniform Limited Liability Company Act (RULLCA). The result is the Wisconsin Uniform Limited Liability Company Law (WULLCL). Wisconsin LLCs should be aware of what the adoption of the WULLCL means for their operations come the new year.
I. Applicability of the WULLCL.
The WULLCL requires Wisconsin LLCs become active participants in how the WULLCL will affect their internal affairs. Namely, the WULLCL provides LLCs with the ability to “opt out of” or “opt in to” the WULLCL’s changes. Any Wisconsin LLC in existence on or before December 31, 2022 may choose to opt out of the WULLCL. A decision to opt out allows Wisconsin LLCs to elect to remain governed by the current LLC rules found in Chapter 183.
Reasons for opting out are particular to each LLC and require dedicated counsel to determine a specific course of action. LLCs electing to remain governed by the current Chapter 183 must file a Statement of Nonapplicability with the Wisconsin Department of Financial Institutions (“DFI”) to opt out of the WULLCL on or before December 31, 2022.
There is also an opt-in component of the WULLCL. LLCs wanting to have the WULLCL apply sooner than January 1, 2023 can do so by amending their operating agreement and filing a Statement of Applicability with the DFI on or before December 31, 2022.
Any existing LLC declining or failing to take affirmative action on or before December 31, 2022 will automatically be governed by the WULLCL effective January 1, 2023. LLCs choosing to opt out of the WULLCL may later opt in by filing a Statement of Applicability at any time. A decision to opt in or opt out must be ratified in the same manner required to amend the LLC’s operating agreement, or, alternatively, by unanimous consent of the members.
II. Articles of Organization.
Under the current Chapter 183, an LLC designates responsibility for the day-to-day management of the LLC in its Articles of Organization. Most typically, an LLC may be managed directly by its members (member-managed) or by one or more managers designated by the members (manager-managed). The WULLCL provides that, unless stated otherwise in the LLC’s operating agreement or Articles of Organization, the LLC is member-managed by default. Practically, this means an LLC may modify its management designation without amending its Articles of Organization (assuming a management designation was not included already).
Aside from the changes to the management designation, the WULLCL also expands the scope of information that may be included in an LLC’s Articles of Organization. Specifically, the WULLCL now permits Articles of Organization to contain categories of information customarily included in an operating agreement, including, without limitation, language concerning the management and affairs of the LLC, the purpose of the entity, language limiting or expanding the powers of the LLC (and its members), and a par value for membership interests. LLCs wishing to include such information should bear in mind that Articles of Organization (as opposed to an operating agreement) are public documents.
III. Operating Agreements.
While not required under current Chapter 183, many Wisconsin LLCs have adopted a written operating agreement intended to address a host of internal governance matters, including contributions, capital accounts, allocations of profits, distributions, management, voting, fiduciary duties, departure of members and dissolution. The WULLCL does not invalidate such operating agreements; provided, such operating agreements are otherwise valid under the current Chapter 183.
However, the WULLCL does introduce a more expansive definition of “operating agreement” than current Chapter 183. Under the WULLCL, an operating agreement may be any combination of written, verbal or implied communications. Thus, it is now more important than ever that Wisconsin LLCs have a written operating agreement that serves as the complete and final expression of the members’ rules and intentions on internal LLC governance matters. Namely, members should make effective use of language precluding the introduction or use of external communications or understandings—commonly known as an “integration clause.” It is also advisable that operating agreements include language precluding any amendment of the operating agreement unless made in writing.
IV. Authority of Members.
The WULLCL eliminates the concept of “apparent authority” – the notion that third parties may assume an LLC member has the authority to speak on behalf of the LLC and commit it to contracts and other obligations, solely because the member is a member. Under the WULLCL, an LLC may file with the DFI a Statement of Authority, which identifies the authority of (i) a specific person; and/or (ii) a specific position. Persons not identified in the Statement of Authority, including members of the LLC, will no longer have apparent authority to bind the LLC after December 31, 2022.
The Statement of Authority will permit the LLC to place specific limitations on the authority of such person or position, which will remain effective for five years from the date of filing. Interestingly, any person named in a Statement of Authority may file with the DFI a Statement of Denial of Authority rejecting all or part of the authority granted. The Statement of Authority will be particularly useful for LLCs that frequently deal with sophisticated parties or operate in the financial industry, as investors and lenders alike will likely look to rely on the Statement of Authority, rather than a full-length operating agreement to identify authorized parties.
V. Fiduciary Duties.
The current Chapter 183 does not expand on fiduciary duties for members and managers. The fiduciary duties of members and managers among each other and to the LLC are largely a product of case law. The WULLCL now expressly delineates the fiduciary duties of loyalty, care and good faith and fair dealing. The WULLCL allows LLCs to eliminate or expand upon certain components of these duties via a written operating agreement, including through establishing the standards upon which the LLC will use to evaluate whether a breach of fiduciary duty has occurred.
In short, LLCs subject to the WULLCL must take care to scrutinize the fiduciary duties it wishes to impose on its members or managers through a carefully drafted written operating agreement. Current Wisconsin LLCs should note, consistent with the “savings clause” applicable to currently-valid operating agreements, any waiver of fiduciary duties contained in an operating agreement in existence prior to January 1, 2023, will be honored (provided such waiver was valid under the current Chapter 183).
VI. Charging Orders.
Under the current Chapter 183, a creditor’s only recourse against an LLC member’s interest is a “charging order”. A charging order allows a creditor to share in the profits and losses of the LLC, as well as receive distributions and an allocation of income or loss attributable to the debtor member’s capital account. In theory, charging orders allow the creditor to be “made whole” (i.e., their debt paid back) over time.
The WULLCL provides creditors with the opportunity to expedite this process. If the creditor does not believe it will be made whole within a “reasonable” period of time, they may petition a court to order the sale of the member’s ownership interest through a judicial foreclosure. Importantly, for multi-member LLCs, such a foreclosure does not cause or allow the creditor to become a member of the LLC. Conversely, if the LLC is a single-member LLC, the WULLCL provides that such a foreclosure may permit the creditor to become a member in the LLC, thereby causing the debtor member’s dissociation from the LLC.
While beyond the scope of this article, Wisconsin’s legislature also largely adopted the Revised Uniform Limited Partnership Act, which governs limited partnerships, to replace the current version of Chapter 179 of the Wisconsin Statutes—known as the Wisconsin Uniform Limited Partnership Law (WULPL). The changes set forth in WULPL are similar to those contained in the WULLCL with some entity-specific nuances.
We encourage businesses to reach out to their Law Firm of Conway, Olejniczak & Jerry, S.C. Business Formation and Restructuring Attorney to discuss what approach to the WULLCL (or WULPL) works best for their entity, noting the decision to opt out of the WULLCL (or WULPL) must occur before December 31, 2022.