On April 15, 2022, Governor Tony Evers signed 2021 Wis. Act 258 into law.¹ Act 258, among other things, repealed and recreated Wis. Stat. chapter 183 to adopt the most recent version of the Revised Uniform Limited Liability Company Act (RULLCA), with certain Wisconsin-specific modifications. (In this article, the Act is referred to as the “New LLC Act,” although it also made changes to statutes affecting other types of business entities.) As observed by the authors in the article “A Look Back and Ahead: The Wisconsin Limited Liability Company” (elsewhere in this issue), this update has been in the works for quite some time. Act 258 also made several changes to Wis. Stat. chapters 178, 179, 180, and 181, as detailed in the article, “New Wisconsin Legislation: Uniform Laws – Partnership, Corporate Changes” (also in this issue).

The New LLC Act will apply to all LLCs formed on or after Jan. 1, 2023. The New LLC Act will also apply on Jan. 1, 2023, to all LLCs created before that date unless the preexisting LLC 1) elects to be governed earlier by filing a statement of applicability² with the Wisconsin Department of Financial Institutions (DFI); or 2) elects to continue being governed by the existing law applicable before enactment of the New LLC Act by filing a statement of nonapplicability³ with the DFI no later than Dec. 31, 2022.

This article reviews the New LLC Act on a subchapter-by-subchapter basis, noting the most significant changes to current Wis. Stat. chapter 183, as well as some notable instances in which the New LLC Act departs from RULLCA to preserve current Wisconsin law and practice. For readers interested in a more granular analysis, the official text of RULLCA with commentary by the Uniform Law Commission (ULC) is available online.⁴ Additionally, the LLC Committee of the State Bar’s Business Law Section issued a report in connection with the adoption of Act 258 (the “LLC Committee Report”), which details the rationale for the non-editorial variations between the New LLC Act and both RULLCA and current chapter 183.⁵

Subchapter I – General Provisions

Perhaps the most significant development in the New LLC Act is the redefinition of an operating agreement to include any agreement – whether oral, in a record, implied, or in any combination thereof – between and among all members of an LLC (including a sole member) concerning the LLC’s internal affairs.⁶

Under this broad definition, the existence of an “operating agreement” (if only verbal or implied) is functionally inevitable. However, certain matters that could be addressed in an operating agreement should, for a number of reasons (both philosophical and practical), be evidenced by a writing. Accordingly, the New LLC Act also creates the defined term written operating agreement, meaning an operating agreement, in whole or part, that is “set forth in writing.”⁷

The New LLC Act further specifies the things that an operating agreement can and cannot do, including those that can be done only via a written operating agreement.

Of particular note, an operating agreement can specify the method by which an act or transaction that would otherwise violate the duty of loyalty can be authorized or ratified after the disclosure of all material facts.⁸ A written operating agreement can also 1) alter or eliminate, or restrict remedies with respect to, certain aspects of the duty of loyalty; 2) 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; 3) alter the duty of care, if it does not authorize prohibited conduct; or 4) alter or eliminate any other fiduciary duty.⁹

An operating agreement must not eliminate or restrict remedies for the breach of the contractual obligation of good faith and fair dealing.¹⁰ However, a written operating agreement may prescribe standards, if not manifestly unreasonable, by which performance of the obligations are measured.¹¹ An operating agreement cannot allow exoneration for any of the following:

1. A willful failure to deal fairly with the company or its members in connection with a matter in which the person has a material conflict of interest;

2. A violation of criminal law, unless the person had reasonable cause to believe that the person’s conduct was lawful or no reasonable cause to believe that the person’s conduct was unlawful;

3. A transaction from which the person derived an improper personal profit; or

4. Willful misconduct.¹²

Another provision of note is new Wis. Stat. section 183.0104(1)(2m) (which is not contained in the RULLCA). This section clarifies that an LLC’s election to be taxed under the Internal Revenue Code as a partnership, an S corporation, or a C corporation will not of itself affect the governing law applicable to the LLC’s internal affairs or members’ interest-holder liability. That said, such election might still be a fact that is relevant in the application of those rules.¹³

Subchapter II – Formation; Articles of Organization and Other Filings

Under current law, an organizer files with the DFI articles of organization, which must contain only certain specified information. The New LLC Act will allow organizers to submit their own form of articles of organization containing terms regarding several other specified matters.¹⁴

Additionally, the New LLC Act eliminates the current requirement that the form of management (that is, member-managed or manager-managed) be specified in the articles of organization. Removing this requirement obviates the need for an LLC to amend its articles of organization if the members decide among themselves to change the form of management via their operating agreement. The form of management could still be made a matter of public record on the LLC’s annual report, “statement of authority,” or both.

Subchapter III – Relations of Members and Managers to Persons Dealing with LLC

The New LLC Act eliminates the concept of “apparent authority” and makes clear that a member is not an agent of an LLC solely by reason of being a member. However, an LLC may file with the DFI a statement of authority identifying the authority of any position within 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.

A statement of authority is effective for five years from its original filing or its most recent amendment or renewal.¹⁵ Any person whom the statement of authority identifies as having filing authority can file a statement of denial, which denies the grant of authority.¹⁶

Subchapter IV – Relations of Members to Each Other and to LLC

Admission of Noncontributing Members. The New LLC Act allows the admission of “non-economic” members: persons who may become members without acquiring a transferable interest and without making or being obligated to make a contribution.¹⁷ This provision is intended to accommodate business practices and to reflect the fact that an LLC need not have a business purpose. Among other things, this would facilitate the use of LLCs as 501(c)(3) organizations (much like nonstock corporations under Wis. Stat. chapter 181).

Distributions. In a significant departure from the RULLCA default, the New LLC Act retains the provisions of current Wis. Stat. chapter 183 that state, absent a written operating agreement providing otherwise, distributions must be made proportionally on the basis of the value of the contributions made by each member.¹⁸ However, the New LLC Act modifies the existing rule with respect to LLCs treated as partnerships for tax purposes. The New LLC Act states that the value of members’ relative contributions will be measured by using partnership capital accounts (as maintained for tax purposes, not book or other accounting purposes) – rather than the initial contribution reflected in the company’s records – because a capital account will be the most recent and accurate measure.¹⁹

Voting Power. Similarly, the New LLC Act retains the provisions of current Wis. Stat. chapter 183 that, absent a written operating agreement providing otherwise, the voting power of membership interests is allocated proportionally on the basis of the value of the contributions made by each member. This, too, will be measured with reference to partnership capital accounts (as maintained for tax purposes, not book or other accounting purposes) if the LLC is a partnership for tax purposes.²⁰

The New LLC Act further requires that, if manager-management is intended, provision must be made in a written operating agreement.²¹

The New LLC Act further specifies the things that an operating agreement can and cannot do, including those that can be done only via a written operating agreement.

Members’ and Managers’ Duties. Finally, the New LLC Act includes default provisions regarding the duty of loyalty and duty of care owed by members (in a member-managed LLC) and managers (in a manager-managed LLC) – subject to modification by operating agreement in accordance with the provisions of Wis. Stat. section 183.0105.²²

The duty of loyalty includes the duties 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;

• 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

• Refrain from competing with the LLC in the conduct of the LLC’s business.²³

However, all 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.²⁴ Also, it is a defense to a claim of dealing adversely with the LLC that the transaction was fair to the LLC.²⁵

The duty of care, in the conduct or winding up of the LLC’s business, includes refraining from:

• Willfully failing to deal fairly with the LLC or its members when the person has a material conflict of interest,

• Violating criminal laws,

• Engaging in a transaction in which the person derives an improper personal profit, or

• Engaging in willful misconduct.²⁶

Subchapter V – Transferable Interests and Rights of Transferees and Creditors

One of the most significant developments since the creation of the original LLC laws was the enactment of the “check-the-box” entity classification regulations, effective Jan. 1, 1997. These regulations define which unincorporated associations might be recognized as a corporation. These, in turn, gave rise to the use of “single-member LLCs,” which are generally treated as “disregarded entities” for tax purposes.

The New LLC Act’s provisions related to foreclosure of charging-order liens now make a distinction between multi-member LLCs and single-member LLCs. Under current law, a creditor of an LLC member (as opposed to the LLC itself), cannot generally foreclose on the LLC membership interest of that member. Instead, the creditor may obtain a “charging order lien” on the economics (for example, rights to distributions and allocation of profits and losses) associated with the membership interest. By contrast, the New Actprovides for the transfer of the entire membership interest of a sole member upon the foreclosure of a charging-order lien – not just a “transferrable interest” – as well as the dissociation of the person whose interest was the subject of the foreclosure.²⁷ This is consistent with tax authority, which treats the purchase by a buyer of all of the interests in a disregarded entity as a purchase of its assets.²⁸ It is also consistent with the fact that the “pick-your-partner” principle – which animated the concept of the charging order in the first place – is not germane in the context of a single-member LLC.

Subchapter VI – Dissociation

The New LLC Act introduces the concept of a “wrongful” dissociation, which does not exist under current Wis. Stat. chapter 183.²⁹ However, certain changes were made to the RULLCA language to avoid creating default statutory rules that would run contrary to the expectations of members in existing LLCs and that would apply in situations that would be better left to the parties involved to address. As modified, a person’s dissociation from an LLC is only wrongful when it is in breach of a written operating agreement.³⁰

The New LLC Act provides that an LLC or LLC member may seek a judicial order for a member’s expulsion (thus resulting in dissociation) when a member 1) has engaged in, or is engaging, in wrongful conduct that has (or will) adversely and materially affect the LLC’s activities or affairs; or 2) has willfully or persistently committed a material breach of the operating agreement or other duties or obligations.³¹ Deadlock or other matters that make it not practicable to carry on business – but are not otherwise wrongful or a breach of the operating agreement themselves – remain grounds for judicial dissolution of the LLC as a whole³² but would not be grounds for a particular member’s expulsion.

Subchapter VII – Dissolution and Winding Up

The New LLC Act contains provisions regarding the priority of distribution of assets when an LLC dissolves:

1. Creditors are paid first.

2. Then, distributions are to be made in satisfaction of previously approved distributions (including previously approved distributions made in partial redemption of a member’s transferrable interest).³³

3. Next, any proceeds of the LLC are used for the return of contributions of members and dissociated members.

4. Finally, any remaining proceeds are distributed to members and dissociated members in proportion to their respective rights to share in distributions before dissolution.³⁴

Consistent with Wis. Stat. sections 183.0404 (regarding distributions) and 183.0406 (regarding voting power), the New LLC Act varies from the RULLCA on the subject of distributions in liquidation. Absent a written operating agreement to the contrary, surplus proceeds must be allocated proportionally on the basis of the value of the contributions made by each member. This proportional distribution will be measured with reference to partnership capital accounts (as maintained for tax purposes, not book or other accounting purposes) if the LLC is a partnership for tax purposes.³⁵

Subchapter VIII – Actions by Members

The New LLC Act departs from current Wis. Stat. chapter 183 in a number of significant respects but it is not entirely unfamiliar. The new provisions that concern actions by members are akin to the more rigorous procedures applicable for regular business corporations under Wis. Stat. chapter 180. Accordingly, in light of the New LLC Act’s provisions, case law under current Wis. Stat. chapter 183, such as Marx v. Morris,³⁶ might no longer apply.

Subchapter IX – Foreign LLCs

The New LLC Act specifies that “[t]he governing law of a foreign limited liability company governs … [t]he internal affairs of the company [and t]he liability of a member as [a] member and a manager as [a] manager for a debt, obligation, or other liability of the company.”³⁷ This governing-law provision means that an LLC will be able to choose the state laws that will govern the LLC merely by organizing under the laws of that state, but only with respect to such matters.³⁸ This provision does not refer to the liability of the LLC itself for obligations.

Subchapter X – Merger, Interest Exchange, Conversion, and Domestication

The New LLC Act uses the current corporate-merger-related statutes as a key reference for the authority, plan, approval, and effect provisions for mergers and the corresponding provisions for interest exchanges, conversions, and domestication. This maximizes consistency with the provisions of Wis. Stat. chapter 180 relating to corporations and the current cross-species provisions in Wis. Stat. chapters 178, 179, 180, and 181. A summary of these common provisions, and how they relate to each of the five business entity chapters, is contained in “Cross Species/DFI Provisions Crosswalk,” appended to the LLC Committee Report.³⁹

A Wisconsin LLC must not engage in a merger, an interest exchange, a conversion, or a domestication that causes any specified material adverse effects or imposes disparate treatment on a member unless either 1) “[t]he member consents to the merger, interest exchange, conversion or domestication”; or 2) “[t]he member has consented to the provision of the written operating agreement that provides for approval of a merger, conversion, or domestication with the consent of fewer than all the members.”⁴⁰ A member will not be deemed to have given the requisite consent merely by consenting to a provision of a written operating agreement that generally permits the operating agreement to be amended with the consent of fewer than all members.⁴¹

The specified material-adverse effects include a material increase in the member’s “current or potential obligations … whether as a result of becoming subject to interest holder liability … becoming subject to affirmative or negative obligations under the organizational documents of the entity, becoming subject to tax on the income of the entity, or otherwise.”⁴² As a consequence, becoming subject to fiduciary obligations as a general partner of a surviving partnership, or as a member in a member-managed LLC, could be sufficient to trigger this provision.

The New LLC Act specifically authorizes “interest exchanges” involving domestic LLCs. Such a transaction allows the parties to accomplish in a single step a structural outcome that could otherwise be accomplished by forming a new subsidiary and then engaging in a triangular merger.⁴³

The New LLC Act’s conversion provision is based on the current Wisconsin law cross-species transaction provisions and differs from the RULLCA in one respect. Transactions whereby a domestic LLC “converts” to a foreign LLC (and vice versa) are called “domestications” and treated separately as such under the RULLCA. However, the New LLC Act defines domestications as a “dual-domicile” status, based on the corresponding provisions under Delaware law.

Finally, a domestication is a transaction whereby a Wisconsin LLC can be simultaneously governed both by Wis. Stat. chapter 183 and by the law applicable to a non-U.S. entity (whether or not it is the same type of entity under its non-U.S. governing law), if the domesticated entity meets the definition of an LLC under Wis. Stat. chapter 183 and the transaction is not prohibited by the governing law applicable to the non-U.S. entity.

Conclusion

Current chapter 183 – though partially modeled on a draft of the ABA’s “Prototype Limited Liability Company Act” – was (and is) a relatively home-brewed construct. While there have been some modifications and periodic updates since its original enactment, to reflect some of the policies and principles adopted by Wisconsin in chapters 178 and 180, chapter 183 essentially remains a “first-generation” LLC statute. With the New LLC Act, Wisconsin joins the 23 other states that have already adopted a version of RULLCA’s “second-generation” LLC statute – and Wisconsin businesses stand to gain enormous benefits from the uniformity this brings.

Endnotes

¹ See 2021 Wis. Act 258, https://docs.legis.wisconsin.gov/2021/related/acts/258; ​see also Senate Bill 566 (with Legislative Reference Bureau commentary), https://docs.legis.wisconsin.gov/2021/related/proposals/sb566.

² See https://www.wdfi.org/_resources/indexed/site/corporations/dfi-corp-399-599.pdf.

³ See https://www.wdfi.org/_resources/indexed/site/corporations/dfi-corp-398-598.pdf.

⁴ See Official RULLCA Text from the Uniform Law Commission (with Comments), https://tinyurl.com/2hm6njk9. Also see, Kleinberger & Bishop, The Next Generation: The Revised Uniform Limited Liability Company Act, 62 Business Law. 515 (2007), an open access article, at http://open.mitchellhamline.edu/facsch/224.

⁵ LLC Committee Report of the State Bar of Wisconsin’s Business Law Section, https://mtfnmke-my.sharepoint.com/:b:/g/personal/kkm_mtfn_com/EQ6H458tvn5Et3QX9uvdG-QB6b_Cq_mQ6VetUYUoxpJsCw?e=uAeoef.

⁶ See Wis. Stat. § 183.0102(13). Unless otherwise indicated, references to the Wisconsin Statutes in the endnotes are to the statutes as affected by 2021 Wis. Act 258.

⁷ See Wis. Stat. § 183.0102(26). The legislative history (specifically, the LLC Committee Report) clarifies that a “written operating agreement” need not be a single, integrated instrument, and it need not be “signed” or “subscribed” by a member to be considered agreed by and effective against such member. Rather, the common law of contracts and the laws of evidence will determine if a particular document or written communication (or series of documents or written communications) – such as an “e-mail chain” by and among the members of an LLC – is sufficient to constitute an agreement of the members that is “set forth in writing.” See LLC Committee Report at pp.2-3.

⁸ See Wis. Stat. § 183.0105(4)(a)(1).

⁹ See Wis. Stat. § 183.0105(4)(c).

¹⁰ See Wis. Stat. § 183.0105(3)(f).

¹¹ See id.

¹² See Wis. Stat. § 183.0105(3)(g).

¹³ For example, whether an LLC is a partnership for tax purposes is a fact that would be relevant to how the default distribution and voting provisions of Wis. Stat. sections 183.0404(1), 183.0407(2)(b), and 183.0707(2)(b) are applied, per the express terms of those sections. Likewise, the fact that members might be subject to pass-through taxation and, as such, accustomed to so-called tax distributions from a company (to enable them to pay their individual taxes attributable to pass-through income), might be relevant in the adjudication of a claim of “minority oppression” – if, for example, managers or majority members were to reduce or eliminate such distributions for the purpose of harming a minority member and without a valid business purpose.

¹⁴ See Wis. Stat. § 183.0201(3).

¹⁵ See Wis. Stat. § 183.0302.

¹⁶ See Wis. Stat. § 183.0303.

¹⁷ See Wis. Stat. § 183.0401(5).

¹⁸ See Wis. Stat. §§ 183.0404(1), 183.01075(7); see also LLC Committee Report at p. 11.

¹⁹ See Wis. Stat. § 183.0404(1); see also LLC Committee Report at p. 11.

²⁰ See Wis. Stat. § 183.0407(2)(b); see also LLC Committee Report at p. 12

²¹ See Wis. Stat. § 183.0407(1).

²² See Wis. Stat. § 183.0409.

²³ See Wis. Stat. § 183.0409(2).

²⁴ See Wis. Stat. § 183.0409(6).

²⁵ See Wis. Stat. § 183.0409(7).

²⁶ See Wis. Stat. § 183.0409(3).

²⁷ Compare Wis. Stat. section 183.0503(6) of the New LLC Act with Wis. Stat. section 183.0705.

²⁸ See Rev. Rul. 99-5, 1999-1 C.B. 434 (situation 1); see also Judge Halpern’s dissent in Suzanne J. Pierre, 133 T.C. 24, 44 (2009) (describing the evolution of this conclusion).

²⁹ See Wis. Stat. § 183.0601(2).

³⁰ See Wis. Stat. § 183.0601(2)(a).

³¹ See Wis. Stat. § 183.0602(6).

³² See Wis. Stat. § 183.0701(1)(d)2.

³³ See Wis. Stat. § 183.0707(2).

³⁴ See id.

³⁵ See Wis. Stat. § 183.0707(2)(b); see also LLC Committee Report at p. 16.

³⁶ Marx v. Morris, 2019 WI 34, 386 Wis. 2d 122, 925 N.W.2d 112.

³⁷ See Wis. Stat. § 183.0901(1).

³⁸ See id.

³⁹ See LLC Committee Report at pp. 34-38.

⁴⁰ See Wis. Stat. § 183.1061(1), (2).

⁴¹ See Wis. Stat. § 183.1061(3).

⁴² See Wis. Stat. § 183.1061(1).

⁴³ See Wis. Stat. § 183.1031(1). This means that such “exchange” transactions can occur even when there is no complete “acquisition” of the “acquired entity,” just as they may under corresponding Wis. Stat. section 180.1102, part of the Wisconsin business-corporation statutes. An interest exchange must include all outstanding interests of one or more classes or series of interests of the acquired entity, but there may be outstanding interests of another class or series that are not being acquired.

» Cite this article: 95 Wis. Law. 20-25 (June 2022).