1. Operating Agreements

Previously, under Wisconsin’s old LLC laws, LLCs required a written operating agreement. Without this, the statutes determined how an LLC would operate.

Now, under Wisconsin’s 2023 LLC laws, operating agreements can consist of any combination of oral, recorded, implied, and written statements not specifically put into the operating agreement. This means it’s crucial that LLCs operating under the new law ensure they have:

• An amendment term that requires any amendment to the terms to be in writing and signed by the members involved.
• An integration clause that confirms, upon signature of the members, the operating agreement being signed is the completed agreement of how the LLC will operate.

2. Fiduciary Duties

Previously, an operating agreement could fully waive or modify any fiduciary duty of an individual in the LLC.

Now, fiduciary duties are owed to the LLC by:

• all members in member-managed LLCs
• the manager in manager-managed LLCs

Some fiduciary duties can be waived or modified in the operating agreement, while others can’t.

Permitted modifications of fiduciary duties include:

• The ability to specify which acts or transactions would otherwise violate the duty of loyalty to the LLC, and how they can be authorized or ratified after the disclosure of all material facts.
• The ability to alter, eliminate, or restrict remedies, with respect to certain aspects of the duty of loyalty to the LLC.
• The ability to identify specific categories of activities that don’t violate the duty of loyalty or the contractual obligation of good faith and fair dealing.
• The ability to alter the duty of care, if it doesn’t authorize prohibited conduct.
• The ability to alter or eliminate any fiduciary duty.

For example:

Member A and Member B are in a member-managed LLC that operates a real estate investing business. One day, Member A goes to the grocery store and runs into an Old Friend. Old Friend, knowing member A invests in real estate, offers to sell them a property. Member A can’t fully waive duty of loyalty in the operating agreement to purchase his Old Friend’s property. However, under the new law, the operating agreement can specify certain transactions. So, Member A’s LLC could specify that transactions presented to members by friends or family aren’t considered a violation of Member A’s fiduciary duties.

Prohibited modifications of fiduciary duties include:

• 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.
• A violation of criminal law, unless the person had reasonable cause to believe their conduct was lawful, or there was no reasonable cause to believe that the person’s conduct was unlawful.
• A transaction from which a person derived an improper personal profit.
• Willful misconduct.

3. Authority to sign

Previously, each member was considered an agent to the LLC, which meant they each had apparent authority to bind the LLC to agreements or other written legal documents.

Now, there are two options to show which members have the authority to sign documents, binding the LLC:

1. A statement of authority filed through the Wisconsin Department of Financial Institutions (WDFI). This provides a public record confirming which member has authority to bind the LLC. There is an optional limit of five years.
2. A resolution, which can either be blanket authority for any and all documents, or specific to a transaction. A resolution is the best option for clients with privacy concerns, as resolutions are not required to be filed with the WDFI.

If neither of these options apply to your business, each member will need to sign all agreements for the LLC.

4. Rights of creditors in single member LLCs

Previously, a creditor of an LLC member generally couldn’t foreclose on the membership interest of that member. The creditor would have to obtain a charging order lien on the economic portion of the applicable interest only.

Now, judges may foreclose on a member interest in an LLC. This means single member LLC membership interests that are subject to foreclosure upon a charging order lien will be forced to transfer the entire membership of a sole member to the creditor, and the member will be automatically dissociated from the LLC.

5. Disbursements

Previously, in the absence of a provision in the written operating agreement, distributions had to be made proportionally based on the value of the contributions by each member of the LLC, regardless of which tax classification the LLC filed under.

Now, when an LLC is set up to be taxed as a partnership, disbursements by members must be measured using the partnership capital accounts.

Other provisions of Wisconsin’s 2023 LLC laws

• Custom articles of organization: Similarly to the updated operating agreement laws, you can now add custom terms to your LLC’s articles of organization.
• Electing manager-managed LLC: The operating agreement must now specifically state that it is manager-managed and identify the manager.
• Non-contributing members: Non-economic members are now permitted. This means that members can be part of the LLC while not needing to contribute financially. This can be especially helpful when an LLC wants a member to have an administrative role, or act as a signor for the LLC.

Is my business affected?

It’s possible that your LLC will not be required to operate under the 2023 LLC laws. These laws do not apply to obligations incurred by the LLC before January 1, 2023.

If your operating agreement was valid and in effect before this date, it will continue to be valid if it was permitted by the prior laws.

If your LLC filed the Statement of Non-Applicability with the WDFI on or before December 31, 2022, your LLC can operate under Wisconsin’s old LLC laws.

Every year, we help investors across Wisconsin create LLCs and navigate the ever-changing legal landscape. If you need help setting up an LLC, or advice on how the 2023 LLC laws may affect your business, call your friends at Zimmer & Rens.