This bill repeals and recreates Wisconsin's limited partnership law to adopt the
Revised Uniform Limited Partnership Act (2001), as last amended in 2013 (RULPA),
subject to certain modifications. Many provisions of RULPA and current law are
similar, including the following: A limited partnership is a legal entity separate from
its partners, and the filing of a certificate of limited partnership is required to form
a limited partnership. A limited partnership is distinguished from a general
partnership by the presence of limited partners. A limited partnership must have
at least one general partner and at least one limited partner. The limited
partnership generally is managed by general partners, and limited partners
primarily provide capital for the limited partnership. A partnership agreement
usually provides rules of governance for the limited partnership and, in many
instances, statutory provisions are default rules that govern the limited partnership
only in the absence of applicable terms in the partnership agreement. However, in
some instances, the terms of the partnership agreement may not vary from statutory
requirements. Unless stated otherwise in the partnership agreement, a limited
partnership interest (a partner's right to receive distributions from the limited
partnership) is transferable, but the recipient of the transfer (transferee) generally
is entitled to receive only partnership distributions and does not gain the voting and
other rights of a partner. Yet there are significant changes to current law made by
RULPA, as adopted under this bill, which are discussed below.
Formation and partnership agreement
Current law defines “limited partnership" as a partnership formed under
applicable state law by two or more persons and having one or more general partners
and one or more limited partners. To form a limited partnership, a certificate of
limited partnership, containing certain information, must be filed with the
Department of Financial Institutions. The limited partnership is formed upon the
filing of the certificate of limited partnership or, if a later date is specified in the
certificate of limited partnership, on that later date.
Under this bill, a certificate of limited partnership containing specified
information must still be filed with DFI to form a limited partnership. However, the
limited partnership is not formed until the certificate of limited partnership is filed
and becomes effective and the limited partnership, which must have at least two
partners, has at least one general partner and at least one limited partner. The bill
also eliminates as required information in the certificate of limited partnership a
statement of duration of the limited partnership (when the limited partnership must
dissolve). Instead, the bill specifies that a limited partnership has perpetual
duration, although this may be modified by the partnership agreement.
The bill clarifies that a person may be both a general partner and a limited
partner and that the rights, powers, duties, and obligations of such a person are
determined by the capacity in which the person acts.
The bill includes provisions related to permissible names for a limited
partnership. The bill eliminates a provision of current law that, with exceptions,
prohibits a limited partner's name from appearing in the limited partnership's name.
The bill also changes the standard for permissible limited partnership names. Under
current law, a limited partnership's name may not be the same as or “deceptively
similar" to the names of certain other businesses. Under the bill, a limited
partnership's name must be “distinguishable" from the names of certain other
businesses.
Current law defines “partnership agreement" as any valid agreement of the
partners (limited partners and general partners) as to the affairs of a limited
partnership and the conduct of its business. Certain provisions of current law
relating to rights and duties of and restrictions on a partner in a limited partnership
apply only if there is no contrary provision in the partnership agreement.
This bill provides more specific guidance, in comparison with current law, as to
when the provisions of a partnership agreement override contrary statutory
provisions and when they do not. Under the bill, “partnership agreement" means the
agreement, whether oral, implied, written, or recorded in a tangible or electronic
medium, of all the general and limited partners of a limited partnership concerning:
1) relations among the partners and between the partners and the limited
partnership; 2) the activities and affairs of the limited partnership and the conduct
of those activities and affairs; 3) the means and conditions for amending the
partnership agreement; and 4) mergers and other reorganizations involving the
limited partnership. As to these matters, statutory provisions govern only in the
absence of an applicable provision in the partnership agreement. However, the bill
also imposes restrictions on the terms of a partnership agreement. Among these
restrictions, a partnership agreement may not vary from certain statutory
provisions relating to the following: the power of a person to dissociate as a general
partner, except with respect to a limited liability limited partnership (LLLP)
(discussed further below); the grounds for expulsion of a general partner by judicial
order because of certain conduct by the general partner; the causes of dissolution;
requirements for winding up the limited partnership's activities and affairs;
requirements for DFI filings or for a limited partnership's registered agent; lawsuits
by and against partners and the limited partnership; records and information
required to be kept by the limited partnership and a partner's right of access to the
records and information; a partner's fiduciary and other duties (discussed further
below); and the applicable law governing a limited partnership's internal affairs and
the liability of its partners. The partnership agreement also governs the obligations
of the limited partnership and its partners to a person dissociated as a partner
(discussed further below) and to a transferee of a partner's interest, but an
amendment to the partnership agreement after a person has dissociated as a partner
cannot impose a new obligation on the person.
Partner liability and limited liability limited partnerships
Under current law, a general partner of a limited partnership has the same
liabilities as a partner in a partnership without limited partners (general
partnership). In general, all partners in a general partnership are jointly and
severally liable for all debts, obligations, and other liabilities of the general
partnership. In contrast, a limited partner is generally not liable for the obligations
of the limited partnership. However, there are exceptions if the limited partner is
also a general partner or if the limited partner participates in the control of the
business and a person who transacts business with the limited partnership
reasonably believes that the limited partner is a general partner.
Under this bill, general partners are, with exceptions, liable jointly and
severally for all debts, obligations, and other liabilities of the limited partnership.
The bill also eliminates the “control" exception under current law to a limited
partner's exemption from liability. Under the bill, a limited partner is not personally
liable for a debt, obligation, or other liability of the limited partnership solely by
reason of being or acting as a limited partner, even if the limited partner participates
in the management and control of the limited partnership.
Under current law, a general partnership may form as or become a limited
liability partnership (LLP), and a partner in an LLP is not personally liable for any
debt, obligation, or liability of the LLP, except that under some circumstances the
partner may be liable for the partner's own actions or the actions of a person under
the partner's supervision and control.
This bill allows a limited partnership to form as or become an LLLP by
including a statement to this effect in the certificate of limited partnership. If a
limited partnership is an LLLP, a general partner is not personally liable for a debt,
obligation, or other liability of the LLLP solely by reason of being or acting as a
general partner. Instead, a debt, obligation, or other liability incurred by the LLLP
is solely that of the LLLP.
Fiduciary and other duties of partners
Under current law, except as provided in the partnership agreement, a general
partner of a limited partnership generally has the rights and powers, and is subject
to the restrictions, of a partner in a general partnership. In general, a partner in a
general partnership owes to the partnership and to the other partners duties of
loyalty and care and must discharge the partner's duties and obligations consistently
with the contractual obligation of good faith and fair dealing. Except as provided in
the partnership agreement, a general partner or limited partner may lend money to
and transact other business with the limited partnership.
This bill more directly specifies a general partner's duties to the limited
partnership and to other partners and also specifies the extent to which these
statutory duties may be overridden by the partnership agreement. The bill also
specifies a limited partner's duties. Under the bill, unless the duty is permissibly
modified in the partnership agreement (as discussed below), a general partner owes
to the limited partnership, and to the other general and limited partners, duties of
loyalty and care, as described below. A general partner must also discharge its duties
and obligations, whether statutory or arising under the partnership agreement, and
exercise its rights, consistently with the contractual obligation of good faith and fair
dealing. However, a general partner does not violate a duty or obligation solely
because the general partner's conduct furthers the general partner's own interest.
Under the bill, a general partner owes a fiduciary duty of loyalty that includes
the duty 1) to account to the limited partnership and hold as trustee for it any
property, profit, or benefit derived by the general partner in the conduct or winding
up of the partnership's activities and affairs, from use of the partnership's property,
or from the appropriation of a partnership opportunity; 2) to refrain from dealing
with the partnership, in the conduct or winding up of the partnership's activities and
affairs, adversely or on behalf of a person having an adverse interest; and 3) to refrain
from competing with the partnership in the conduct of the partnership's activities
and affairs. However, all the general and limited partners, or those disinterested
partners with authority to act, may authorize or ratify, after disclosure of all material
facts, a specific act or transaction by a general partner that otherwise would violate
the duty of loyalty. Also, it is a defense to a claim of dealing adversely with the limited
partnership (item 2 above) that the transaction was fair to the limited partnership.
Under the bill, a general partner also owes a duty of care, in the conduct or
winding up of the limited partnership's activities and affairs, to refrain from 1)
grossly negligent or reckless conduct; 2) willfully failing to deal fairly with the
limited partnership or its partners when the partner has a material conflict of
interest; 3) violating the criminal law; 4) engaging in a transaction in which the
partner derives an improper personal profit; or 5) engaging in willful misconduct.
Under the bill, in contrast to general partners, limited partners have minimal
duties to the limited partnership. A limited partner must exercise any rights under
the statutes or the partnership agreement and discharge any duties under the
partnership agreement consistently with the contractual obligation of good faith and
fair dealing. A limited partner does not have any other duty to the limited
partnership or to any other partner solely by reason of acting as a limited partner.
Under the bill, the partnership agreement of a limited partnership may not do
any of the following: alter or eliminate, or restrict remedies for the breach of, the duty
of loyalty or the duty of care owed by a general partner, except as described below;
eliminate a general partner's or limited partner's contractual obligation of good faith
and fair dealing, but may, if not manifestly unreasonable, prescribe standards by
which performance of the obligation is measured or restrict remedies for breach of
the obligation; or relieve a partner from liability for conduct that violates the duty
of care (described above). However, the partnership agreement may specify the
method by which an act or transaction that would otherwise violate the duty of
loyalty may be authorized or ratified after the disclosure of all material facts. If not
manifestly unreasonable, the partnership agreement may also alter or eliminate, or
restrict remedies with respect to, certain aspects of the duty of loyalty; identify
specific types or categories of activities that do not violate the duty of loyalty or the
contractual obligation of good faith and fair dealing; otherwise alter the duty of care;
or alter or eliminate any other fiduciary duty. A court determines, as a matter of law,
whether a term of a partnership agreement is manifestly unreasonable.
Under the bill, if a general partner acts in compliance with the general
partner's fiduciary and other duties, the limited partnership must reimburse the
general partner for any payment made by the general partner in the course of the
general partner's activities on behalf of the partnership and must indemnify the
general partner with respect to third-party claims. The limited partnership may
also advance reasonable litigation expenses to the general partner. A general
partner is also entitled to reimbursement from the limited partnership for advances
to the partnership beyond the amount of capital the general partner agreed to
contribute, which advances are considered loans.
The bill also allows a limited partnership to file with DFI a statement of
partnership authority. This statement may recognize or limit, for purposes of a third
party dealing with the limited partnership, the authority of a person to act for or
enter into transactions on behalf of the limited partnership. In this statement, the
limited partnership may identify the authority, or limitations on the authority, of any
person or position (which covers all persons holding that position). The statement
of authority is effective for five years from its original date or its most recent
amendment or renewal, and the statement affects only the power of a person to bind
the limited partnership to persons that are not partners. All persons are deemed to
know of a statement of authority recorded with the register of deeds that limits a
person's authority to transfer real property on behalf of the limited partnership. The
bill also allows any person named in a statement of authority to file with DFI a
statement of denial of authority.
Operating requirements
Current law requires a limited partnership to maintain in this state a record
office where specified limited partnership records are kept. This bill continues to
require a limited partnership to maintain specified records and information and
requires the limited partnership to maintain a registered office in this state. The bill
also retains the current law requirement that the limited partnership maintain a
registered agent for service of process in this state.
This bill requires limited partnerships to file with DFI annual reports
containing specified information. This requirement also applies to registered foreign
limited partnerships, which are limited partnerships governed by the law of another
jurisdiction and authorized to do business in this state.
Under current law, a general partner or limited partner has the right to inspect
and copy any of the partnership records required to be maintained by the limited
partnership and also has certain rights to other information.
As under current law, this bill provides general partners and limited partners
with certain rights to inspect and copy records maintained by the limited
partnership, although the details of these rights in the bill differ from current law.
The bill specifies records and information that the limited partnership must furnish
to general partners and limited partners without demand, as well as information
that the limited partnership must furnish to partners on demand. The duty to
furnish information also applies to each general partner on whom a demand is made,
not just to the limited partnership. The bill also specifies the rights to information
of a person dissociated as a general partner or limited partner. The bill allows a
limited partnership to impose reasonable restrictions and conditions on access to and
use of information furnished by the partnership.
Dissociation of partners
Current law specifies the circumstances under which a general partner or
limited partner may withdraw from a limited partnership. With a narrow exception,
a limited partner may withdraw from a limited partnership only at the time or upon
the occurrence of an event specified in the partnership agreement. In contrast, a
general partner may withdraw from a limited partnership at any time by giving
notice to the other partners, but if the withdrawal violates the partnership
agreement, the limited partnership may recover damages from the withdrawing
general partner for breaching the partnership agreement. Current law also specifies
events that, absent consent of all partners, cause a person to cease to be a general
partner of the limited partnership, including that the general partner: 1) is removed
as a general partner in accordance with the partnership agreement; 2) assigns all his
or her partnership interest to another; 3) files for bankruptcy; or 4) dies or is
adjudicated incompetent.
This bill adopts the term “dissociation" in connection with the voluntary or
involuntary withdrawal of a general partner or limited partner from a limited
partnership and modifies the bases under which a partner's dissociation from the
limited partnership occurs. Among other events causing dissociation, a general
partner is dissociated when 1) the partner withdraws from the partnership or is
expelled from the partnership; 2) an event occurs that, under the terms of the
partnership agreement, results in the partner's dissociation; 3) the partner becomes
a debtor in bankruptcy, dies, has a guardian or conservator appointed, or is adjudged
to be incapable of performing his or her duties under the partnership agreement; or
4) the partnership dissolves and completes winding up. A general partner has the
power to dissociate from a limited partnership at any time, rightfully or wrongfully,
by expressly withdrawing, but the dissociation is wrongful if it breaches the
partnership agreement or if it occurs before the winding up of the limited partnership
and the general partner withdraws by express will, is expelled by judicial order, files
for bankruptcy, or dissolves or terminates. A general partner that wrongfully
dissociates is liable to the limited partnership and the other partners for damages
caused by the dissociation.
Under this bill, in contrast to a general partner, a limited partner does not have
a right to dissociate before the winding up of the limited partnership. The bill
specifies that, among the events causing dissociation, a limited partner is dissociated
when 1) the partner withdraws from the partnership or is expelled from the
partnership; 2) an event occurs that, under the terms of the partnership agreement,
results in the partner's dissociation; 3) the partner dies or, if an entity, its existence
terminates; or 4) the partnership dissolves and completes winding up.
The bill provides more specific information, in comparison with current law,
about the effects of a general partner's or limited partner's dissociation from a
limited partnership. Among these effects, a dissociated general partner has no right
to participate in the management and conduct of the partnership activities and
affairs; a dissociated partner's interest takes on the status of a transferee's interest
rather than a partner's interest; and certain obligations terminate as to future
events but may continue to apply to past events.
Under current law, a partner that withdraws from a limited partnership is
entitled to receive, within a reasonable time after withdrawal, the fair value of the
partner's interest in the limited partnership as of the date of withdrawal, unless the
partnership agreement provides otherwise.
Under this bill, unless the partnership agreement provides otherwise, a
partner has no right to a distribution before the dissolution and winding up of the
limited partnership, and any earlier distribution to a dissociated partner is
discretionary with the limited partnership.
Dissolution and winding up
This bill modifies some of the grounds under which a limited partnership is
dissolved and its activities and affairs must be wound up. Under current law, among
the grounds for dissolution, a limited partnership may be voluntarily dissolved on
the written consent of all general partners and limited partners.
Under the bill, a limited partnership may be voluntarily dissolved on the
consent of all general partners and of limited partners owning a majority of the rights
to receive distributions, whether as a general partner, limited partner, or both.
Under current law, if any general partner withdraws or otherwise ceases to be
a general partner, the limited partnership is dissolved unless: 1) the partnership
agreement allows the limited partnership to continue and there is at least one
remaining general partner that continues the partnership's business; or 2) within 90
days, all partners agree to continue the business of the limited partnership and to
appoint one or more additional general partners if necessary.
Under this bill, there is no presumptive dissolution of the limited partnership
upon dissociation of a general partner. Instead, upon dissociation of a general
partner, the limited partnership is dissolved only if: 1) the partnership has at least
one remaining general partner and partners owning a majority interest consent,
within 90 days, to dissolve the partnership; or 2) the partnership does not have any
remaining general partner and 90 days pass without both of the following occurring:
a majority (by interest) of limited partners consenting to continue the partnership;
and, at least one general partner being admitted.
Under current law, a limited partnership must file a certificate of cancellation
upon dissolution or at any other time that there are no limited partners.
The bill provides that a limited partnership is dissolved if: 1) 90 consecutive
days pass after the dissociation of the partnership's last limited partner without the
partnership admitting at least one limited partner; or 2) 90 consecutive days pass
during which the limited partnership has only one partner or does not have both a
general partner and a limited partner. The bill, which does not require a certificate
of limited partnership to include a statement of duration, also eliminates the
automatic dissolution under current law of a limited partnership upon expiration of
its stated duration.
Under this bill, a dissolved limited partnership, in winding up its activities and
affairs, may amend its certificate of limited partnership to state that the partnership
is dissolved and may also file a statement of termination with DFI. With exceptions,
a limited partnership that initiates dissolution may also rescind its dissolution and
continue carrying on its activities and affairs as if dissolution had never been
initiated.
The bill also provides DFI with authority to administratively dissolve a limited
partnership. Under the bill, DFI may commence a proceeding to dissolve a limited
partnership administratively if the limited partnership does not pay a required fee
or penalty or file an annual report within one year after the fee or penalty or report
is due or is without a registered agent or registered office in this state for at least one
year. The bill establishes a procedure for these proceedings and allows an
administratively dissolved limited partnership to apply to DFI for reinstatement.
The bill also provides a process for appeal and court review of DFI's denial of an
application for reinstatement.
Mergers, conversions, and other business combinations
This bill makes significant changes with respect to mergers, conversions, and
other business-combination transactions involving domestic or foreign limited
partnerships. Under current law, one or more domestic limited partnerships may
merge with or into one or more other domestic or foreign business entities (business
corporations, nonprofit or nonstock corporations, limited liability companies, or
limited partnerships) if the merger satisfies certain requirements. Current law also
allows a domestic limited partnership to convert to another form of domestic or
foreign business entity if the conversion satisfies certain requirements.
This bill significantly changes the requirements applicable to a merger or
conversion involving a limited partnership and also allows a limited partnership to
undertake transactions in the form of an interest exchange or domestication. In an
interest exchange, a limited partnership acquires interests of another domestic or
foreign business entity, or has its own interests acquired by another domestic or
foreign business entity. In a domestication, an entity governed by the law of a foreign
country (a non-U.S. entity) may domesticate as a domestic limited partnership
under Wisconsin law while continuing to be subject to the foreign country's law and
a domestic limited partnership may domesticate as a non-U.S. entity subject to a
foreign country's law while continuing to be a domestic limited partnership. The bill
allows mergers, conversions, interest exchanges, and domestications to involve a
diverse array of business entities, including business corporations, nonprofit or
nonstock corporations, limited liability companies, limited partnerships, LLPs,
cooperative associations, and unincorporated associations. Certain requirements
apply to these business-structure transactions, including approval of a plan of
merger, conversion, interest exchange, or domestication and filing with DFI articles
of merger, conversion, interest exchange, or domestication, although the terms of the
partnership agreement generally govern mergers, conversions, interest exchanges,
and domestications. When the merger, conversion, interest exchange, or
domestication becomes effective, certain results occur automatically, as a matter of
law, with respect to such matters as assets, obligations, continued existence, and
organizational documents of the parties involved in the transaction. The bill also
eliminates a provision of current law that requires a surviving foreign business
entity in a merger to pay dissenting owners of merged domestic business entities for
their interests, but creates new dissenter's rights for a partner in a
business-structure transaction if the transaction materially increases the partner's
obligation or liability or treats the partner's interest different from that of other
partners.
Other changes
Under current law, on application to the circuit court by a creditor that has
obtained a judgment against a general partner or limited partner, the court may
charge the partnership interest of the partner with payment of the unsatisfied
amount of the judgment. To the extent charged, the judgment creditor has only the
rights of an assignee of the partnership interest.
This bill expands on provisions of current law under which a creditor of a
general partner or limited partner may seek from a court a charging order against
the partner's interest in the limited partnership to satisfy the unpaid amount of the
creditor's judgment. Under the bill, a charging order is available against the interest
of either a partner or a transferee of a partner. A charging order constitutes a lien
on the partner's or transferee's interest and requires the limited partnership to pay
over to the creditor any distribution that otherwise would be paid to the partner or
transferee. Under certain circumstances, the court may foreclose the lien and order
the sale of the partner's or transferee's interest in the limited partnership. The
purchaser of the interest at the foreclosure sale obtains only the interest and does
not thereby become a partner or gain any right to participate in the activities and
affairs of the limited partnership.
Under current law, a limited partner may bring an action on behalf of a limited
partnership (derivative action) to recover a judgment in its favor if general partners
with authority to do so have refused to bring the action or if an effort to cause those
general partners to bring the action is not likely to succeed.
This bill continues to allow a limited partner to bring a derivative action and
also allows a general partner to bring a derivative action. However, under the bill,
the limited partnership may appoint a special litigation committee to investigate the
claims in the derivative action and to determine whether pursuing the action is in
the best interests of the limited partnership. The special litigation committee must
be composed of disinterested and independent individuals, who may be partners. If
the limited partnership appoints a special litigation committee, the court must, on
motion of the committee, stay discovery for the time reasonably necessary to permit
the committee to make its investigation, unless there is good cause shown for the
court to deny the stay. After appropriate investigation, the special litigation
committee may determine that it is in the best interests of the limited partnership
for the proceeding to continue under the control of the plaintiff; for the proceeding
to continue under the control of the committee; for the proceeding to be settled on
terms approved by the committee; or for the proceeding to be dismissed. After
making its determination, the special litigation committee must submit its
determination to the court and, if the court determines that certain requirements are
satisfied, the court must follow and enforce the committee's recommendation. If the
court finds the applicable requirements are not satisfied, the court must dissolve the
stay of discovery and allow the plaintiff to continue the action.
The bill provides a procedure and specifies grounds for DFI to terminate
authority of a foreign limited partnership to do business in this state.
The bill includes many changes relating to procedures applicable to limited
partnerships and foreign limited partnerships, including changes related to
registered agents, service of process, and permissible names. The bill also provides
a procedure for DFI to issue a certificate of status for a limited partnership or foreign
limited partnership.
This bill includes provisions specifying when a person is considered to have
notice or knowledge of a fact. The bill also specifies when a person is considered to
have given another person notice of a fact. The bill also allows DFI to provide written
notice to a limited partnership or foreign limited partnership solely by e-mail to its
registered agent.
The bill includes numerous other substantive and stylistic changes from
current law. The bill also includes some modifications from, or additions to, the
model language of RULPA. For example, the bill includes provisions relating to DFI
fees that are not included in RULPA.
Phase-in
The changes in this bill apply to a limited partnership formed on or after
January 1, 2021, and apply on January 1, 2021, to a limited partnership formed
before that date unless 1) the limited partnership elects to be governed earlier by the
new provisions of the bill, or 2) the limited partnership elects to be governed by the
existing law applicable before enactment of the bill.
PARTNERSHIPS
In enacting
2015 Wisconsin Act 295, this state repealed and recreated
Wisconsin's partnership law to adopt, with modifications, the Revised Uniform
Partnership Act (RUPA), as last amended in 2013. This state's law was previously
based on an earlier version of the Uniform Partnership Act. With a limited exception,
a partnership formed on or after January 1, 2018, is subject to the new statutory
provisions of RUPA.
This bill makes modifications to the state's partnership law as created in Act
295, including changes relating to 1) a partnership's governing law; 2) prohibited
provisions in a partnership agreement; 3) DFI's fees for partnership-related filings;
4) consent to partnership action without a meeting of the partners; 5) a partner's
duty of care in the conduct or winding up of the partnership business; 6)
compensating a dissociated partner; 7) claims against a dissolved limited liability
partnership; 8) business-structure transactions involving partnerships, including
dissenter's rights for a partner; and 9) the method by which DFI may provide written
notice to a partnership.
LIMITED LIABILITY COMPANIES
In 1992, the ULC began working on the Uniform Limited Liability Company
Act, which was completed in 1994 and approved in 1996. Before the ULC had
completed its work, many states had already passed limited liability company (LLC)
legislation and the American Bar Association had created a prototype LLC Act. The
ULC adopted a Revised Uniform Limited Liability Company Act in 2006, which was
amended in 2013.
Wisconsin authorized the creation of LLCs prior to the ULC's first model act,
by enacting
1993 Wisconsin Act 112, effective January 1, 1994. Since then, various
modifications have been made to this state's LLC law.
This bill repeals and recreates Wisconsin's LLC law to adopt the Revised
Uniform Limited Liability Company Act (2006), as last amended in 2013 (RULLCA),
subject to certain modifications. Many provisions of RULLCA are similar to current
law. Under both current law and RULLCA, an LLC is a distinct legal entity separate
from its members and may be organized for any lawful purpose. An LLC may be
managed by its members or by managers, and an operating agreement between the
members may provide rules of governance for the LLC. In many instances, statutory
provisions are merely default rules that govern an LLC only in the absence of
applicable terms in an operating agreement, but in some instances the terms of an
operating agreement may not vary from statutory requirements. Some of the
significant changes to current law made by RULLCA, as adopted under this bill, are
discussed below.
Formation and operating agreement
Under current law, an organizer files articles of organization with the
Department of Financial Institutions to form an LLC. The articles of organization
must contain specified information and may not contain any additional information.
This bill modifies the information required in articles of organization filed with
DFI and allows additional information to be included in the articles of organization.
The bill also specifies that an LLC has perpetual duration (although the duration
may be modified by the operating agreement). The bill allows a person, in addition
to various other permissible ways, to become a member of an LLC in any way
provided for in the operating agreement. The bill includes various provisions
regarding the formation of a one-member LLC (which is also permitted under
current law).
Current law defines “operating agreement" to include only a written document
and allows for the possibility that an LLC could be formed and operate without an
operating agreement. Under current law, “operating agreement" means an
agreement in writing, if any, among all of the members as to the conduct of the
business of an LLC and its relationships with its members.
Under this bill, the operating agreement may be oral or written, express or
implied, and an LLC cannot exist without an operating agreement. Under the bill,
“operating agreement" means the agreement, whether or not referred to as an
operating agreement and whether oral, implied, written, or recorded in a tangible or
electronic medium, or in any combination of these, of all the members of an LLC,
including a sole member, concerning 1) relations among the members as members
and between the members and the LLC; 2) the rights and duties of managers; 3) the
activities and affairs of the LLC and the conduct of those activities and affairs; 4) the
means and conditions for amending the operating agreement; and 5) mergers,
conversions, and other business combinations.
This bill provides more specific guidance, in comparison with current law, as to
when the provisions of an operating agreement override contrary statutory
provisions and when they do not. Under the bill, subject to certain exceptions, the
operating agreement governs all matters described in items 1) to 5), above, but if the
operating agreement does not provide for a matter described in items 1) to 5), above,
statutory provisions govern the matter. The operating agreement also governs the
obligations of an LLC and its members to a person dissociated as a member or a
person to whom a member's interest (right to receive distributions from the LLC) has
been transferred. The bill includes a list of matters for which the operating
agreement may not vary from statutory provisions, including matters related to a
member's fiduciary and other duties, discussed below.
Authority of members
This bill generally eliminates the concept of “apparent authority" in connection
with LLCs. Under current law, in a member-managed LLC, each member is an
agent of the LLC and, subject to exceptions, the act of a member for apparently
carrying on the business of the LLC binds the LLC. This principle does not apply in
a manager-managed LLC, where the managers, not the members, are the agents of
the LLC for purposes of carrying on its business.
Under this bill, a member is not an agent of an LLC solely by reason of being
a member. An LLC may file with DFI a statement of authority identifying the
authority of any position with the LLC (which covers all persons holding that
position), identifying the authority of any specific person, or identifying limitations
on the authority of any position or person. The statement of authority is effective for
five years from its original date or its most recent amendment or renewal, and the
statement affects only the power of a person to bind the LLC to persons that are not
members. The bill allows any person named in a statement of authority to file with
DFI a statement of denial of authority.
Fiduciary and other duties of members and managers
Under current law, unless otherwise provided in an operating agreement, a
member or manager cannot act, or fail to act, in a manner that constitutes willful
misconduct; a willful failure to deal fairly with the LLC or its members where the
member or manager has a material conflict of interest; or, with exceptions, a violation
of criminal law. Unless otherwise provided in an operating agreement, a member or
manager cannot derive improper personal profit from a transaction. A member or
manager must account to the LLC, and hold as trustee for it, any improper personal
profit derived, without the consent of a majority of the disinterested members or
managers, from a transaction connected with the LLC or from use by the member or
manager of LLC property, including confidential or proprietary information.
Under this bill, unless the duty is permissibly modified in the LLC's operating
agreement (as discussed below), a member of a member-managed LLC, or a manager
of a manager-managed LLC, owes to the LLC, and to its members, fiduciary duties
of loyalty and care, as described below. A member or manager must also discharge
its duties and obligations, whether statutory or arising under the operating
agreement, and exercise its rights, consistently with the contractual obligation of
good faith and fair dealing. However, a member does not violate a duty or obligation
solely because the member's conduct furthers the member's own interest.
Under the bill, a member of a member-managed LLC, or a manager of a
manager-managed LLC, owes a duty of loyalty that includes the duty 1) to account
to the LLC and hold as trustee for it any property, profit, or benefit derived by the
member or manager in the conduct or winding up of the LLC's business, from use of
the LLC's property, or from the appropriation of an LLC opportunity; 2) to refrain
from dealing with the LLC, in the conduct or winding up of the LLC's business,
adversely or on behalf of a person having an adverse interest; and 3) to refrain from
competing with the LLC in the conduct of the LLC's business. However, all the
members of an LLC may authorize or ratify, after disclosure of all material facts, a
specific act or transaction that otherwise would violate the duty of loyalty. Also, it
is a defense to a claim of dealing adversely with the LLC (item 2, above) that the
transaction was fair to the LLC.
Under the bill, a member of a member-managed LLC, or a manager of a
manager-managed LLC, also owes a duty of care, in the conduct or winding up of the
LLC's business, to refrain from 1) willfully failing to deal fairly with the LLC or its
members when the person has a material conflict of interest; 2) violating the criminal
law; 3) engaging in a transaction in which the person derives an improper personal
profit; or 4) engaging in willful misconduct.
Under the bill, the operating agreement may not alter or eliminate, or restrict
the remedies for breach of, the duty of loyalty or the duty of care, except as described
below; eliminate, or restrict remedies for the breach of, the contractual obligation of
good faith and fair dealing, but a written operating agreement may prescribe
standards, if not manifestly unreasonable, by which performance of the obligation
is measured; or relieve a person from liability for conduct that violates the duty of
care described in items 1) to 4) in the immediately preceding paragraph. However,
the operating agreement may specify the method by which an act or transaction that
would otherwise violate the duty of loyalty may be authorized or ratified after the
disclosure of all material facts. In a member-managed LLC, a written operating
agreement may also eliminate or limit a member's fiduciary duty if it also relieves
the member of a responsibility and imposes it on another member. A written
operating agreement may also alter or eliminate, or restrict remedies with respect
to, certain aspects of the duty of loyalty; identify specific types or categories of
activities that do not violate the duty of loyalty or the contractual obligation of good
faith and fair dealing; alter the duty of care, if it does not authorize the conduct
described in items 1) to 4) in this paragraph; or alter or eliminate any other fiduciary
duty.
Operating requirements
This bill makes changes to the information that must be contained in an LLC's
annual report. Under current law, if a domestic LLC or registered foreign LLC is
manager-managed, its annual report must contain the name and business address
of each manager. The annual report of a registered foreign LLC must also contain
the name and business address of each LLC member. A domestic LLC is one
organized under this state's law and a registered foreign LLC is one organized under
the law of another state or jurisdiction and authorized to do business in this state.
Under this bill, the annual report of a domestic LLC or registered foreign LLC
must include the name of at least one member if it is member-managed or the name
of at least one manager if it is manager-managed.
This bill makes some changes with respect to the records that an LLC must
keep at its office. As under current law, the bill provides members with certain rights
to, on request, inspect and copy records maintained by the LLC, and requires the
LLC to provide records and information, although the details of these requirements
in the bill differ from current law. Under the bill, managers have these rights in a
manager-managed LLC. In addition, the bill requires an LLC, without request, to
furnish each member in a member-managed LLC, or each manager in a
manager-managed LLC, with any information concerning the LLC's activities,
affairs, financial condition, and other circumstances that the LLC knows and is
material to the proper exercise of the member's or manager's rights and duties,
unless the member or manager already knows the information. In a
manager-managed LLC, the LLC must, without request, provide members with all
known, material information before the member is required to vote on or give or
withhold consent to a matter. In addition to the LLC's duty, each member in a
member-managed LLC, or each manager in a manager-managed LLC, has a duty
to furnish information known by the member or manager. The bill also contains
provisions relating to the rights to information after a person dissociates as a
member. The bill allows an LLC to impose reasonable restrictions and conditions on
access to and use of information furnished by the LLC.
Current law includes provisions relating to when notice to, or knowledge of, a
member or manager is imputed to an LLC.
This bill eliminates these provisions and creates new provisions as to when a
person is considered to have notice or knowledge of a fact. The bill also specifies when
a person is considered to have given another person notice of a fact.
The bill also allows DFI to provide written notice to an LLC solely by e-mail to
its registered agent.
Dissociation of members
As under current law, this bill specifies circumstances under which a member
of an LLC dissociates from the LLC, including voluntary dissociation. Under the bill,
a person may dissociate as a member at any time, rightfully or wrongfully, by
withdrawing as a member by express will. A person's dissociation as a member is
wrongful if, among other things, the dissociation is in violation of a written operating
agreement. The bill provides more specific information, in comparison with current
law, about the effects of a member's dissociation from an LLC. Among these effects,
a person dissociated as a member has no right to participate in the management and
conduct of the LLC's business and the person's right to distributions takes on the
status of the right of a transferee. Upon dissociation, certain obligations of the
person terminate as to future events but continue to apply to past events.
Under current law, if a member withdraws from an LLC and the withdrawal
occurs as a result of the member's wrongful conduct, the LLC may recover from the
withdrawing member damages as a result of the wrongful conduct.
