AB566: Bill Text

Under current law, an organizer files articles of organization with DFI 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 the immediately preceding 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.

Under this bill, a member that wrongfully dissociates from an LLC is liable for damages caused by the dissociation and the liability is to both the LLC and to any other member if the other member shows that its injury is not solely the result of injury suffered by the LLC.

Under current law, a member who dissociates from an LLC has a right to a distribution in complete redemption of the fair value of the member's interest at the time of dissociation, unless the operating agreement provides otherwise.

Under this bill, unless the operating agreement provides otherwise, a distribution to a person who dissociates as a member of an LLC is discretionary with the LLC, and the person has no right to a distribution. The bill also specifies that an LLC's obligations to a person dissociated as a member are governed by the operating agreement, but an amendment to the operating agreement after the person has dissociated as a member cannot impose a new obligation on the person.

This bill expands on provisions of current law under which a creditor of an LLC's member may seek from a court a charging order against the member's interest in the LLC to satisfy the unpaid amount of the creditor's judgment. Under the bill, a charging order is available against the interest (right to receive distributions) of either a member or a person to whom the member's interest has been transferred (transferee). A charging order constitutes a lien on the member's or transferee's interest and requires the LLC to pay over to the creditor any distribution that otherwise would be paid to the member or transferee. Under certain circumstances, the court may foreclose the lien and order the sale of the member's or transferee's interest in the LLC. The purchaser of the interest at the foreclosure sale obtains only the interest and does not thereby become a member or gain any right to participate in the business of the LLC. The bill includes specific provisions applicable when a court orders foreclosure of a charging order lien against a single-member LLC.

Dissolution and winding up

This bill modifies some of the grounds under which an LLC is dissolved and its activities and affairs must be wound up, and replaces the term “articles of dissolution" in current law with the term “statement of dissolution." As new grounds for dissolution under the bill, dissolution occurs upon the passage of 90 consecutive days during which the LLC has no members. The bill eliminates as a ground for judicial dissolution of an LLC that the LLC is not acting in conformity with its operating agreement. The bill also eliminates a “grandfather" provision relating to dissolution of an LLC organized before October 1, 2002.

Under current law, DFI may administratively dissolve an LLC that does not file its annual report within one year after it is due. Under this bill, DFI may administratively dissolve an LLC if the LLC does not pay any required fee or penalty within one year after it is due; does not file its annual report within one year after it is due; is without a registered agent in this state for at least one year; does not notify DFI within one year of changes to its registered agent or registered office; or commits certain crimes involving human trafficking.

Mergers, conversions, and other business combinations

This bill makes significant changes with respect to mergers, conversions, and other business combinations involving domestic or foreign LLCs. Under current law, one or more domestic or foreign LLCs may merge with or into one or more other domestic or foreign business entities (business corporations, nonprofit or nonstock corporations, LLCs, or limited partnerships) if the merger satisfies certain requirements. Current law also allows a domestic LLC 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 an LLC and also allows an LLC to undertake transactions in the form of an interest exchange or domestication. In an interest exchange, a domestic LLC 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 LLC under Wisconsin law while continuing to be subject to the foreign country's law and a domestic LLC may domesticate as a non-U.S. entity subject to a foreign country's law while continuing to be a domestic LLC. Under the bill, a merger, conversion, interest exchange, or domestication is not limited to transactions involving business entities that are business corporations, nonprofit or nonstock corporations, LLCs, or limited partnerships; the bill allows these transactions to include other entities such as limited liability partnerships, cooperative associations, and unincorporated associations. Certain requirements apply to organizational transactions under the bill, 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 operating 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. With respect to a merger, the bill also eliminates a provision of current law that gives a dissenting member of the LLC who does not vote in favor of the merger the right, upon dissociation from the LLC, to receive fair value for the member's LLC interest, unless the operating agreement provides otherwise.

Other changes

Under the bill, a member of an LLC may bring a derivative action against the LLC to enforce a right of the LLC if certain conditions are satisfied. The LLC 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 LLC. The special litigation committee must be composed of disinterested and independent individuals, who may be members. If the LLC 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 LLC 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.

This bill also changes many terms used under current law in connection with LLCs. For example, in addition to changing “articles of dissolution" to “statement of dissolution," the bill changes “articles of correction" to “statement of correction" or “statement of change," depending on the circumstances.

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 RULLCA.

Phase-in

The changes in this bill apply to an LLC formed on or after January 1, 2023, and apply, on January 1, 2023, to an LLC formed before that date unless 1) the LLC elects to be governed earlier by the new provisions of the bill, or 2) the LLC elects to be governed by the existing law applicable before enactment of the bill. When the provisions of the bill become applicable to an LLC, provisions of prior law relating to obligations incurred by the LLC prior to the bill's enactment continue to apply and any provision of an operating agreement that was valid before enactment of the bill remains valid.

CORPORATIONS

This bill also makes changes to the law governing business corporations and nonstock corporations that generally correspond to the changes applicable to limited partnerships, LLCs, and partnerships, including changes similar to those described above and related to 1) mergers, conversions, and other business-structure transactions; 2) the process and fees for corporate filings with DFI; 3) procedures and requirements applicable to corporations including those related to registered agents and permissible names; 4) the method by which DFI may provide written notice to a corporation; and 5) consent to corporate action without a meeting.

Because this bill creates a new crime or revises a penalty for an existing crime, the Joint Review Committee on Criminal Penalties may be requested to prepare a report.

For further information see the state fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB566,1 Section 1 . 11.0101 (9) of the statutes is amended to read:

AB566,25,3 11.0101 (9) “Corporation" includes a foreign limited liability company, as defined in s. 183.0102 (8) (5), and a limited liability company, as defined in s. 183.0102 (10) (8), if the foreign limited liability company or the limited liability company elect to be treated as a corporation by the federal internal revenue service, pursuant to 26 CFR 301.7701-3, or if the foreign limited liability company or the limited liability company has publicly traded shares.

AB566,2 Section 2 . 13.69 (1) of the statutes is amended to read:

AB566,25,10 13.69 (1) Except as provided in sub. (2m), any principal violating ss. 13.61 to 13.68 or a rule of the commission promulgated under those sections may be required to forfeit not more than $5,000. In the case of a partnership, other than a foreign or domestic limited liability partnership or a limited liability limited partnership, each of the partners, other than a limited partner of a limited partnership, is jointly and severally liable for any forfeiture imposed under this subsection.

AB566,3 Section 3. 44.03 (3) of the statutes is amended to read:

AB566,25,25 44.03 (3) Every affiliated society shall make a report of its work annually to the historical society that contains the information specified in s. 181.1622 (1) (a) to (e) sub. (3m), which, in its entirety or in part, may be included in the publications of the historical society, and upon application of any affiliated society the historical society may accept, in behalf of the state, custody of or title to the property, records and collections of the affiliated society or may assist in the disposal thereof. If any affiliated society becomes, in the opinion of the board of curators of the historical society, inactive or defunct, title to such property, records and collections not otherwise provided for in the grants of donors or in the articles of incorporation of the inactive and defunct society, shall vest in the historical society which shall take appropriate action in the public interest for the protection or disposal of such property, records and collections. Preference in disposition shall be given to historical or related organizations in the area or to whatever county or local governmental unit that has aided such affiliate financially.

AB566,4 Section 4. 44.03 (3m) of the statutes is created to read:

AB566,26,3 44.03 (3m) The report under sub. (3) shall include all of the following information:

AB566,26,5 (a) The name of the domestic nonstock corporation or foreign nonprofit or nonstock corporation and the state or country under whose law it is incorporated.

AB566,26,7 (b) The mailing address of its registered office and the name and e-mail address of its registered agent at that office in this state.

AB566,26,8 (c) The mailing address of its current principal office.

AB566,26,9 (d) The name and business address of each director and principal officer.

AB566,26,10 (e) A brief description of the nature of its business.

AB566,26,11 (f) Whether the nonprofit or nonstock corporation has members.

AB566,5 Section 5 . 71.80 (21) of the statutes is amended to read:

AB566,26,18 71.80 (21) Business entity conversion. Notwithstanding any provision of ss. 178.1141 to 178.1145, 179.76 179.1141 to 179.1145, 180.1161, 181.1161, and 183.1207 183.1041 to 183.1045, the conversion of a business entity to another form of business entity under s. 178.1141, 179.76 179.1141, 180.1161, 181.1161, or 183.1207 183.1041 shall be treated for state tax purposes in the same manner as the conversion is treated for federal tax purposes.

AB566,6 Section 6 . 71.80 (21m) of the statutes is amended to read:

AB566,26,25 71.80 (21m) Business entity interest exchange. Notwithstanding any provision of ss. 178.1131 to 178.1135, 179.1131 to 179.1135, 180.1102, 180.11021, 180.11032, 180.1105, 180.1106, 181.1131 to 181.1135, and 183.1031 to 183.1035, an interest exchange under s. 178.1131, 179.1131, 180.1102, 181.1131, or 183.1031 shall be treated for state tax purposes in the same manner as the interest exchange is treated for federal tax purposes.

AB566,7 Section 7. 71.80 (22) of the statutes is amended to read:

AB566,27,8 71.80 (22) Business entity merger. Notwithstanding any provision of ss. 178.1121 to 178.1125, 179.77 179.1121 to 179.1125, 180.1101, 180.1104 180.11012, 180.11031 to 180.1106, 181.1101, 181.1104 to 181.11055, and 183.1201 183.1021 to 183.1025, the merger of a business entity with one or more business entities under s. 178.1121, 179.77 179.1121, 180.1101, 180.1104, 181.1101, 181.1104, or 183.1201 183.1021 shall be treated for state tax purposes in the same manner as the merger is treated for federal tax purposes.

AB566,8 Section 8 . 71.80 (22m) of the statutes is amended to read:

AB566,27,14 71.80 (22m) Business entity domestication. Notwithstanding any provision of ss. 178.1151 to 178.1155, 179.1151 to 179.1155, 180.1171 to 180.1175, 181.1171 to 181.1175, and 183.1051 to 183.1055, a domestication under s. 178.1151, 179.1151, 180.1171, 181.1171, or 183.1051 shall be treated for state tax purposes in the same manner as the domestication is treated for federal tax purposes.

AB566,9 Section 9 . 73.03 (58) of the statutes is amended to read:

AB566,27,21 73.03 (58) (a) Notwithstanding any provision of ss. 178.1141 to 178.1145, 179.76 179.1141 to 179.1145, 180.1161, 181.1161, and 183.1207 183.1041 to 183.1045, to treat, for state tax purposes, the conversion of a business entity to another form of business entity under s. 178.1141, 179.76 179.1141, 180.1161, 181.1161, or 183.1207 183.1041 in the same manner as the conversion is treated for federal tax purposes.

AB566,28,2 (b) Notwithstanding any provision of ss. 178.1121 to 178.1125, 179.77 179.1121 to 179.1125, 180.1101, 180.1104 180.11012, 180.11031 to 180.1106, 181.1101, 181.1104 to 181.11055, and 183.1201 183.1021 to 183.1025, to treat, for state tax purposes, the merger of a business entity with one or more business entities under s. 178.1121, 179.77 179.1121, 180.1101, 180.1104, 181.1101, 181.1104, or 183.1201 183.1021 in the same manner as the merger is treated for federal tax purposes.

AB566,28,7 (c) Notwithstanding any provision of ss. 178.1131 to 178.1135, 179.1131 to 179.1135, 180.1102, 180.11021, 180.11032, 180.1105, 180.1106, 181.1131 to 181.1135, and 183.1031 to 183.1035, to treat, for state tax purposes, an interest exchange under s. 178.1131, 179.1131, 180.1102, 181.1131, or 183.1031 in the same manner as the interest exchange is treated for federal tax purposes.

AB566,28,12 (d) Notwithstanding any provision of ss. 178.1151 to 178.1155, 179.1151 to 179.1155, 180.1171 to 180.1175, 181.1171 to 181.1175, and 183.1051 to 183.1055, to treat, for state tax purposes, a domestication under s. 178.1151 , 179.1151, 180.1171, 181.1171, or 183.1051 in the same manner as the domestication is treated for federal tax purposes.

AB566,10 Section 10 . 77.25 (6m) of the statutes is amended to read:

AB566,28,18 77.25 (6m) Pursuant to the conversion of a business entity to another form of business entity under s. 178.1141, 179.76 179.1141, 180.1161, 181.1161, or 183.1207 183.1041, if, after the conversion, the ownership interests in the new entity are identical with the ownership interests in the original entity immediately preceding the conversion.

AB566,11 Section 11 . 77.25 (6q) of the statutes is amended to read:

AB566,28,21 77.25 (6q) Pursuant to an interest exchange under s. 178.1131, 179.1131, 180.1102, 181.1131, or 183.1031.

AB566,12 Section 12 . 77.25 (6t) of the statutes is amended to read:

AB566,28,24 77.25 (6t) Pursuant to a domestication under s. 178.1151, 179.1151, 180.1171, 181.1171, or 183.1051.

AB566,13 Section 13 . 77.61 (15) of the statutes is amended to read:

AB566,29,6 77.61 (15) Notwithstanding any provision of ss. 178.1141 to 178.1145, 179.76 179.1141 to 179.1145, 180.1161, 181.1161 to 181.1165, and 183.1207 183.1041 to 183.1045, a business entity that converts to another business entity under s. 178.1141, 179.76 179.1141, 180.1161, 181.1161, or 183.1207 183.1041 shall be subject to the provisions under this subchapter applicable to liquidations, reorganizations, and business entity formations.

AB566,14 Section 14. 97.605 (4) (a) 1. of the statutes is amended to read:

AB566,29,9 97.605 (4) (a) 1. “Business entity" has the meaning given in s. 179.70 (1) 180.1100 (1g).

AB566,15 Section 15. 97.67 (2) (c) (intro.) of the statutes is amended to read:

AB566,29,16 97.67 (2) (c) (intro.) A sole proprietorship that reorganizes as a business entity, as defined in s. 179.70 (1) 180.1100 (1g), or a business entity that reorganizes as a sole proprietorship or a different type of business entity may transfer a license issued under this section for a campground, camping resort, recreational or educational camp, or public swimming pool to the newly formed business entity or sole proprietorship if all of the following conditions are satisfied:

AB566,16 Section 16 . 108.025 (1) (b) of the statutes is amended to read:

AB566,29,21 108.025 (1) (b) An individual named as who is a member of a limited liability company that is treated as a corporation under this chapter in the records of the company required to be kept under s. 183.0405 as of the date of an election under this section.

AB566,17 Section 17 . 139.34 (9) of the statutes is amended to read: