On April 15, 2022, Governor Tony Evers signed Wisconsin Senate Bill 566 into law as 2021 Wis. Act 258 (hereinafter Act 258), modernizing the Wisconsin business entity statutes. Act 258 goes into effect on Jan. 1, 2023. The primary focus of Act 258 is the adoption of the Revised Uniform Limited Liability Company Act and the Revised Uniform Limited Partnership Act, but it also makes material updates to Wisconsin’s current partnership, corporation, and nonstock corporation statutes. By doing so, the Wisconsin Legislature is taking strides to make Wisconsin an attractive home and market for businesses. [For more detailed discussion of Act 258’s limited liability company (LLC) and partnership provisions, see the accompanying feature articles in this issue.]

Understanding why the changes in Act 258 are so significant requires some context on Wisconsin LLC history.

Origins of Wisconsin’s LLC Laws

The American LLC business entity traces its roots to Wyoming in the late 1970s. Wyoming was the first state to adopt an LLC statute, allowing creation of entities that combine limited liability for the business’s owners and taxation as a partnership if chosen.¹ After Wyoming’s (and other early adopting jurisdictions’) LLCs survived initial scrutiny from the IRS,² many additional states quickly followed suit, adopting their own LLC statutes.³ These emergent LLC statutes enacted in the early 1990s were “home-brewed,” a term that refers to the respective LLC laws’ originality and the fact that they generally were tailored specifically to each respective state’s existing business entity statutory schemes. In 1993, Wisconsin created home-brewed LLC laws.

At its outset, like the laws of other home-brewed-LLC states, Wisconsin’s limited liability company law (hereinafter WLLCL or Wis. Stat. ch. 183) took inspiration from other domestic business entity laws in effect at the time.⁴ (Joseph W. Boucher, a coauthor of this article, chaired the original Wisconsin LLC drafting group.) For instance, ideas concerning member management for LLCs came from the then-existing Wisconsin partnership statutes,⁵ and provisions dictating legal formalities of LLCs were influenced by the formalities prescribed by the Wisconsin corporation statutes at the time.⁶ Although the WLLCL was influenced to some degree by the Prototype Limited Liability Company Act,⁷ the Wisconsin Legislature created Wis. Stat. chapter 183 essentially as a hodgepodge of best practices from other areas of business law. As the IRS had yet to give its blessing to the entity form, many key elements of the original law were necessary to ensure that LLCs formed according to the statutes qualified as partnerships for federal tax purposes. For example, Wisconsin LLCs did not originally have perpetual life. This changed in a 2002 amendment to Wis. Stat. chapter 183.⁸

Original WLLCL Did Not Keep Pace with National Developments

Passage of Act 258 is particularly significant because of the relative lack of amendments since the WLLCL was created.⁹ Over the last 30 years, significant events have spurred the need for such updates. The most relevant include the Uniform Law Commission’s drafts of and amendments to the Uniform Limited Liability Company Act, as later revised by the commission into the Revised Uniform Limited Liability Company Act (RULLCA).¹⁰ The Uniform Limited Liability Company Act was a model act intended to provide an option for state legislatures to adopt focused and targeted sets of laws to regulate the organization, maintenance, and termination of LLCs within the applicable state codes. To date, 20 states and the District of Columbia have adopted the RULLCA.¹¹ Importantly, those jurisdictions have also issued ample case law interpreting different provisions of RULLCA-based statutes, providing businesses, entrepreneurs, and lawyers with greater certainty and guidance when making LLC entity business decisions.

One of the biggest developments regarding LLCs occurred in 1996, when the IRS adopted the “check-the-box” regulations allowing LLCs the choice whether to be taxed on the federal level as a partnership or as a corporation.¹² This clarity in tax treatment for LLCs gave businesses greater freedom in how they decide to operate. However, this simplification in the tax treatment of LLCs left many home-brewed LLC statutes, including Wisconsin’s, with several remnant provisions that were crafted to address pre-check-the-box concerns about LLC tax treatment. Many of the home-brewed statutory schemes contain default provisions, such as for transferability of interests and dissolution, that were meant to accommodate the pre-check-the-box regime and were not designed to operate in the more streamlined environment.

Statistically, since the initial WLLCL took effect, the business entity landscape has changed drastically. In Wisconsin, approximately 90% of new entities formed since 2012 are LLCs.¹³ The shift in entity formation preference reflects the business community’s appreciation of both minimal legal formalities and the owner liability protections that LLCs offer.

Passage of Act 258 also is significant because the Act harmonizes Wis. Stat. chapter 183 with the other business entity chapters, thereby reducing gaps and making it easier for entrepreneurs and lawyers to do business in the state, such as allowing for standardized cross-species transactions.

A significant benefit of Act 258 is that it provides Wisconsin courts with a breadth of nonbinding guidance from other jurisdictions with RULLCA-based statutory schemes when interpreting the provisions of Wis. Stat. chapter 183 as repealed and recreated.

Wisconsin LLC Case Law is Sparse

As stated earlier, a major reason for passage of Act 258 is aligning the WLLCL with LLC statutes of other states. This alignment will allow Wisconsin to benefit from the case law developed in such other jurisdictions as guidance for future developments of Wisconsin LLC case law in the likely absence of binding precedent in Wisconsin. Despite nearly 30 years passing since the creation of Wisconsin’s LLC statutes, there are only seven reported cases interpreting provisions of Wis. Stat. chapter 183.¹⁴

2005: In Gottsacker v. Monnier,¹⁵the Wisconsin Supreme Court held that the WLLCL does not preclude members with a material conflict of interest from voting on asset sales, if the members do not willfully act or fail to act in a manner that will injure the LLC or its other members.

2005: In Lenticular Europe LLC v. Cunnally,¹⁶the Wisconsin Court of Appeals considered a minority member’s standing to sue derivatively under the WLLCL. It found that a minority member’s vote was sufficient to bring a derivative action when 1) the operating agreement lacked specific language to the contrary, and 2) the majority member’s interest in the outcome of the action was adverse to the LLC’s and thus its vote must be excluded.

2007: In Kasten v. Doral Dental USA LLC,¹⁷ in the context of a document-inspection request, the supreme court highlighted the WLLCL’s purposes of giving maximum effect to the principle of freedom of contract and to the enforceability of operating agreements, particularly when an operating agreement deviates from the statutory default rules.

2009: In Sanitary District No. 4 – Town of Brookfield v. City of Brookfield,¹⁸ the court of appeals acknowledged the lack of case law interpreting the WLLCL and the differences between the WLLCL and other Wisconsin business entity statutes.

2011: In Executive Center III L.L.C. v. Meieran,¹⁹ the U.S. District Court for the Eastern District of Wisconsin held that common-law fiduciary duties presumptively apply to LLCs.

2017: In Smith v. Kleynerman,²⁰ the supreme court split (3-3) and thus affirmed the court of appeals’ holding that an LLC officer owed fiduciary duties to the business and to other owners.

2019: In Marx v. Morris,²¹ the supreme court broadened the potential liability of individual LLC members. It held that individual members and managers of LLCs owe each other and the LLC common-law fiduciary duties. Individual members have standing to sue other members for harm to the LLC – a derivative action is not required.

This limited body of reported cases represents appellate courts’ entire guidance for business owners, lawyers, and lower courts in Wisconsin for interpretation of the WLLCL.²² In stark contrast, other jurisdictions such as Delaware and Illinois have more than 100 reported opinions interpreting their LLC statutes. This body of case law is invaluable to those states’ LLCs, business owners, lawyers, and judges when it comes to certainty surrounding LLCs. Key business and legal decisions can be made quickly with confidence that the law regarding a number of issues surrounding LLCs is well settled. Therefore, a significant benefit of Act 258 is that it provides Wisconsin courts with a breadth of nonbinding guidance from other jurisdictions with RULLCA-based statutory schemes when interpreting the provisions of Wis. Stat. chapter 183 as repealed and recreated. That said, the paucity of Wisconsin cases means that lawyers must understand Wis. Stat. chapter 183: Because many LLCs will not have written operating agreements, the statutory provisions apply by default.

Lawyers, Accountants, and Entrepreneurs Helped Craft and Pass Act 258

The Wisconsin Institute of Certified Public Accountants and the State Bar of Wisconsin’s Business Law Section strongly supported Act 258.²³ Written testimony provided during the initial senate and assembly hearings on Act 258 called attention to Wisconsin’s place in the nation’s larger business landscape. The consensus of the testimony was that because the previous WLLCL was still a first-generation, home-brewed law, Wisconsin had fallen behind Delaware and many other states in terms of responsiveness to entity law changes. Adoption of new laws might help Wisconsin reverse the negative effects of the existing business statutes, such as a declining population and a narrowing business base.

For individual businesses and entrepreneurs, the updated WLLCL creates benefits such as being able to more easily organize a new business, merge with other businesses, and expand the business to a national scale while remaining based in Wisconsin. These organizations’ testimonies were echoed by Libby Snyder of the Legislative Counsel for the Uniform Law Commission, who contended that the updates would “provide necessary clarity and change” to Wisconsin’s business entity laws to bring them in sync with so many others.²⁴

Conclusion

In times of rapid change, it is vital that Wisconsin modernize its business entity statutes while simultaneously using a uniform law to create more certainty in statutory interpretation. If the past is any guide, there will not be many Wisconsin court decisions on this legislation, making the mirroring of the uniform laws even more beneficial. It also means that lawyers must understand the statutes because they will be the main resource for LLC operating agreements and key to understanding issues facing LLCs in the future. With the updated laws, Wisconsin has seized the opportunity to join other states in the modern LLC movement and Act 258 will help propel the state forward.²⁵

Endnotes

¹ The watershed Wyoming LLC statute was passed in 1977 as special-interest legislation for a mineral company. Wyoming Limited Liability Company Act, ch. 158, 1977 Wyo. Sess. Laws 537 (enacted March 4, 1977); see Joseph W. Boucher et al., LLCs and LLPs: A Wisconsin Handbook § 1.5 (State Bar of Wis. 7th ed. 2021 & Supp.).

² See Rev. Rul. 88-76, 1988-2 C.B. 360. This ruling has been obsoleted by Rev. Rul. 98-37, 1998-2 C.B. 133, but was crucial at the time as authority for other states enacting LLC statutes. See Boucher, supra note 1, § 1.5.

³ See, e.g., Limited Liability Company Act., ch. 434, 68 Del. Laws 1329 (enacted July 22, 1992), codified at Del. Code Ann. tit. 6, §§ 18-101 to 18-1110 (West, Westlaw current through ch. 291 of 151st Gen. Assemb. (2021-22)); see Boucher, supra note 1, at § 1.5.

⁴ Wis. Stat. ch. 183 (2019-20). The Wisconsin LLC statute was approved by the Wisconsin Legislature in 1993 and took effect in 1994. It was drafted by a subcommittee of the State Bar of Wisconsin’s Business Law Committee (the predecessor of the State Bar of Wisconsin’s Business Law Section).

⁵ Wis. Stat. ch. 178 (2019-20).

⁶ Wis. Stat. ch. 180 (2019-20).

⁷ James R. Burkhard, Resolving LLC Member Disputes in Connecticut, Massachusetts, Pennsylvania, Wisconsin and Other States that Enacted the Prototype LLC Act, Am. Bar Ass’n (Feb. 2012) (available to American Bar Association (ABA) Business Law Section members at www.americanbar.org/digital-asset-abstract.html/content/dam/aba/publications/business_lawyer/2012/67_2/article-llc-member-disputes-201202.pdf)​. The ABA created this prototype act in 1992.

⁸ 2001 Wis. S.B. 333.

⁹ Although there have been 22 amendments to the WLLCL since the law took effect in 1994, it is still considered a first-generation law because there have been no significant redrafts. Note the reference to perpetual life being an exception. Also, in the 2002 legislation, cross-species mergers were added. See Boucher, supra note 1, § 1.11.

¹⁰ Unif. L. Comm’n, Limited Liability Company Act, Revised, https://tinyurl.com/52e6n375 (last visited May 4, 2022). The Uniform Limited Liability Company Act was drafted in 1996 and significantly revised in 2006 to become the RULLCA. The RULLCA has been amended twice, in 2011 and 2013.

¹¹Id.

¹²Id.

¹³ Joseph W. Boucher, Wisconsin Entity Historical Trend Data: Developments in Wisconsin Legal Entities 1 (2021).

¹⁴ This number includes Smith v. Kleynerman, 2017 WI 22, 374 Wis. 2d 1, 892 N.W.2d 734. Smith was a review by the Wisconsin Supreme Court of an unpublished Wisconsin Court of Appeals decision. It also includes one federal case, Executive Ctr. III LLC v. Meieran, 823 F. Supp. 2d 883 (E.D. Wis. 2011), in which the district court applied Wisconsin law.

¹⁵Gottsacker v. Monnier, 2005 WI 69, 281 Wis. 2d 361, 697 N.W.2d 436.

¹⁶Lenticular Europe LLC v. Cunnally, 2005 WI App 33, 279 Wis. 2d 385, 693 N.W.2d 302.

¹⁷Kasten v. Doral Dental USA LLC, 2007 WI 76, 301 Wis. 2d 598, 733 N.W.2d 300.

¹⁸Sanitary Dist. No. 4 – Town of Brookfield v. City of Brookfield, 2009 WI App 47, 767 N.W.2d 316, 767 N.W.2d 316.

¹⁹Executive Ctr. III LLC, 823 F. Supp. 2d 883.

²⁰ Smith, 2017 WI 22, 374 Wis. 2d 1.

²¹Marx v. Morris, 2019 WI 34, 386 Wis. 2d 122, 925 N.W.2d 112.

²² Several academic and practical articles have been written about the WLLCL. See, e.g., Collin D. Brunk, Polishing Up Wisconsin’s Fiduciary Duties in LLC Law to Attract New Suitors, 101 Marq. L. Rev. 863 (2018); Josi Wergin, Avoiding a Litigation Free-For-All: Clarifying LLC Members’ Standing to Sue After Marx v. Morris, 2021 Wis. L. Rev. 933; Andrew J. Parrish & Robb E. Leach, Off the Marx: Questions from the Wisconsin Supreme Court’s New Precedent for Limited Liability Companies, Part 1, State Bar of Wis.: Business Law Blog (Feb. 26, 2020), https://www.wisbar.org/NewsPublications/Pages/General-Article.aspx?ArticleID=27497;​ Andrew J. Parrish & Robb E. Leach, Off the Marx: Questions from the Wisconsin Supreme Court’s New Precedent for Limited Liability Companies, Part 2, State Bar of Wis.: Business Law Blog (Feb. 27, 2020), https://www.wisbar.org/NewsPublications/Pages/General-Article.aspx?ArticleID=27498.

²³ Letter from Wis. Inst. of Certified Pub. Accts. & Bus. L. Section Bd. of State Bar of Wis. to Members of S. Comm. on Veterans & Military Affs. & Constitution & Federalism & Members of Assemb. Comm. on Fin. Insts., SB566/AB566 – Business Entities 1 (Oct. 21, 2021). Hearing materials are at https://docs.legis.wisconsin.gov/misc/lc/hearing_testimony_and_materials/2021/sb566/sb0566_2021_10_21.pdf.

²⁴ Statement of Libby Snyder, Legis. Couns. at Unif. L. Comm’n, to Assemb. Comm. on Fin. Insts. & S. Comm. on Veterans & Military Affs. & Constitution & Federalism, in Support of Assembly Bill 566 – Enacting the Revised Uniform Limited Liability Company Act and the Revised Uniform Limited Partnership Act in Wisconsin 2 (Oct. 21, 2021). Hearing materials are at https://docs.legis.wisconsin.gov/misc/lc/hearing_testimony_and_materials/2021/sb566/sb0566_2021_10_21.pdf.

²⁵ Wisconsin’s state motto, “Forward,” represents its continuous drive to be a national leader. Wis. Hist. Soc’y, Odd Wisconsin: Origin of Wisconsin’s “Forward” Motto, Wis. State J. (Oct. 12, 2010) (available to subscribers at https://host.madison.com).

» Cite this article: 95 Wis. Law. 47-50 (June 2022).