Small Business

A couple of year end issues to address for Minnesota Corporations or Limited Liability Companies

By Thomas M. Fafinski | Attorney

If you own or operate a​ Minnesota Corporation or Limited Liability Company, there are a couple of issues you must address by year end.

  1. Renew your entity. If you have a Minnesota entity (corporation, limited liability company, partnership, etc.), you need to complete annual renewals with the Secretary of State. You must renew the entity annually to stay in good standing with the Minnesota Secretary of State and to avoid administrative dissolution. The dissolution of the entity can create gaps in the asset protection afforded by having an entity in place. Further, allowing an entity to dissolve could trigger tax consequences associated with the distribution of assets to the owners at the time of dissolution. If you fail to renew the entity by December 31, 2017, you will be required to reinstate the entity and pay a $45 state filing fee. You can renew the entity yourself, or you can have us reinstate the entity. We only charge $35 per entity to reinstate by yearend. We must hear from you by December 27, 2017. You do not need to retain an attorney, and you can renew it yourself from the Minnesota Secretary of State website. The Secretary of State will not charge you a fee if completed by December 31, 2017. If you fail to renew by the end of this year, the Secretary of State will charge the $45 filing fee to reinstate next year.

  2. Beware of 322C! There are changes to Minnesota law governing LLC's. You may be wondering, how does this affect my limited liability company, and do I need to update my documents? Back in 2015, the State of Minnesota updated its limited liability company act to add many key provisions and make it more consistent with the limited liability company acts of other states. The new Act (322C) is generally easier to follow, requires less corporate formalities, mimics other states in providing governance structure alternatives and contains default provisions beneficial to some owners. The pre-2015 statute operated more like a corporation. The purpose surrounding the original corporate statute mirroring revolved around the ease of introduction to the business community. Other states, especially early state adopters of the LLC entity type, took great effort to make distinctions between LLCs and corporations so that the IRS would provide partnership tax treatment for income. Minnesota adopted the LLC entity type after the IRS recognized LLCs even if they operated like a corporation. The new LLC Act operates more like the state statutes of the early adopters so that it looks and operates more like a partnership (and more like the other state schematics for LLCs), from a default perspective. It also allows for manager-managed LLCs too, which allows key managers to operate the business much more like a limited partnership. Despite all of the flexibility created by the Minnesota legislature, the new act also creates new risks for LLC owners. For instance, oral/verbal agreements between owners can qualify as an Operating Agreement for the company, which can create many he said/she said challenges for owners or significantly increasing creditors rights including allowing them to foreclose on a member's interests. It was not possible to build the LLC under 322B (the old statute) to comply with the new LLC Act (322C) prior to its adoption. When it was passed, the new LLC Act (322C) applied to all new LLC's formed after August 1, 2015 and certain "opt-in" LLCs. However, 322C will begin to apply to all Minnesota LLC's, including pre-August 1, 2015 LLC's,beginning on January 1, 2018. What this means for you, as an LLC owner is as follows:

    1. LLC's Formed After August 1, 2015: If your LLC was formed after August 1, 2015, no immediate action is probably needed, as your LLC is already governed by the new act. However, we recommend a regular compliance review of your Operating Agreement (or LLC Agreement) to ensure that you are taking full advantage of the various tax and governance options for your LLC under 322C. If you do not have a written operating agreement and/or member control agreement, the various oral/verbal agreements that you have between the owners of your company could be considered part of the operating agreement for your company, leading to headaches if owner relationships sour. 322C also increases creditor rights to interfere in the affairs of the company through a charging order, absent clear provisions in the operating agreement restricting those rights. The above challenges and many others can be addressed by a properly drafted written operating agreement. We recommend that any LLC without a written operating agreement have one drafted to take full advantage of the benefits of the new act and address the unique needs of the company and its owners.

    2. Pre-August 1, 2015: If your LLC was formed before August 1, 2015, we recommend a compliance audit of your existing Operating Agreement, Member Control Agreement, and Buy-Sell Agreement, if any, to ensure that each of the documents fully complies with all aspects of the new LLC Act. Again, the new act includes increased charging order rights for creditors that many companies' operating agreements do not address. If you have no operating agreement, member control agreement, and/or LLC Agreement, this is also the perfect time to have one drafted, and take advantage of the many structuring, governance, and tax advantages available under the new LLC act and a properly created operating agreement. If you are unsure if your LLC is governed by the new act (322C) you can find that information by going to https://mblsportal.sos.state.mn.us/Business/Search and searching for your business name. Your business page will list the governing statute (322B, the old LLC act, or 322C, the new LLC Act). Virtus Law, PLLC offers many different options for LLC Compliance Reviews and Operating Agreement updates, including both standard and custom options. If you do nothing or your documents are wrong, you risk exposing yourself to personal liability, creditors could take control of your membership interests, or your partners and you may become business partners with new parties. Finally, without proper documentation, your partners could act outside of their authority and bind the company to agreements that were not intended.

Thomas M. Fafinski is the co-founder of Virtus Law PLLC, an 11-attorney firm, which simulates a general counsel’s office for hundreds of privately-held businesses and real estate interests. Fafinski works or leads litigation, business transactions and strategic planning. virtuslaw.com