On January 1, 2023, the laws governing Wisconsin limited liability companies (“LLC”), Wisconsin limited partnerships (“LP”), and Wisconsin limited liability limited partnerships (“LLLP”) will change. We recommend you consider the implications of the New Law, consult your attorney, and if you have doubt, “opt out” of the New Law, as you can always “opt in” to the New Law later. “Opting out” may be advantageous depending upon your objectives.
An existing LLC, LP or LLLP may “opt out” of the New Law by filing a Statement of Nonapplicability with the Wisconsin Department of Financial Institutions (“WDFI”) by no later than December 31, 2022, which must first be approved by the Owners in the same manner as required for amending the Covered Entity’s operating agreement or partnership agreement. Any existing LLC, LP or LLLP that does not file a Statement of Nonapplicability with the WDFI by December 31, 2022, will be governed by the New Law as of January 1, 2023. This client alert summarizes the applicability and effective date of the New Law and key changes from the past laws.
For ease of reference, we use the following terms in this Client Alert:
- “Act” - 2021 Wisconsin Act 258.
- “Covered Entity” - a Wisconsin LLC, LP or LLLP;
- “New Law” - Chapter 183 and Chapter 179 of the Wisconsin Statutes, each as amended by the Act; and
- “Owners” - the members of an LLC or the partners of an LP or LLLP.
Summary of Key Changes of the New Law
- An operating agreement governing the Covered Entity and its members is likely to be found in effect, even if oral or implied, creating confusion and lack of specificity;
- Owners are required to comply with the statutory duties of care and loyalty, as well as the contractual obligations of good faith and fair dealing; provided Owners may agree to limit these duties and/or the remedies for breach to a certain extent pursuant (only) to a partnership agreement or written operating agreement;
- LLC articles of organization no longer require the management structure to be included;
- Voting thresholds must be met to approve certain activities;
- Members of a member-managed LLC are not agents of the LLC solely by reason of being a member, removing the concept of apparent authority; and
- Liability protection for limited partners that participate in LP’s management.
Wisconsin’s New Limited Liability Company and Limited Partnership Statutes - Applicability and Effective Date
On April 15, 2022, Wisconsin enacted the Act, a new business entity law that restates Chapter 183, governing limited liability companies, and Chapter 179, governing limited partnerships and limited liability limited partnerships. The New Law applies to all Covered Entities formed on or after January 1, 2023. The New Law also applies to preexisting Covered Entities beginning January 1, 2023, unless the preexisting Covered Entity either:
- Elects to be governed by the New Law before January 1, 2023, by filing a Statement of Applicability with WDFI; or
- Elects to “opt out” of the New Law by filing a Statement of Nonapplicability with WDFI by no later than December 31, 2022. By opting out of the New Law, a preexisting Covered Entity will continue to be governed by the current version of Chapter 183 (for LLCs) or Chapter 179 (for LPs and LLLPs). This could be advantageous with respect to the creation of oral or implied operating agreements, as well as the application of fiduciary duties to Owners or managers under the New Law. A Covered Entity that files a Statement of Nonapplicability may subsequently elect to be governed by the New Law at any time by filing a Statement of Applicability.
There is a third option, which is to take no action by December 31, 2022. By taking no action, the New Law will automatically apply to a preexisting Covered Entity on January 1, 2023. However, there is no ability to file a Statement of Nonapplicability on or after January 1, 2023, and the New Law will govern going forward.
Key Changes from the Prior LLC Law
Articles of Organization: The New Law does not require an LLC to include in its articles of organization whether the LLC is member-managed or manager-managed. An LLC can instead provide its management structure in its operating agreement. This change eliminates the need to amend an LLC’s articles of organization when it changes management structure. Further, the New Law permits an LLC to include additional, non-mandatory information in its articles of organization, such as a statement of the LLC’s purpose.
Operating Agreement: Under the prior law, an LLC’s operating agreement could only be in writing. An LLC also could exist without a written operating agreement.
Under the New Law, operating agreements can be written, oral, in a record, implied, or any combination of those options, so long as the agreement concerns the affairs of the LLC. Because operating agreements are defined so broadly in the New Law, it is now nearly impossible for an LLC to exist without one. The New Law does require that certain information be contained in a written operating agreement, such as standards for the contractual obligation of good faith and fair dealing. However, a written operating agreement need not be a single integrated document nor signed by the LLC’s members. Opting out of the New Law helps assure that the members will not be deemed to have made an oral operating agreement or an agreement based upon practice, the terms of which might not be what all the members contemplated.
Additionally, the New Law impacts member voting requirements for certain activities relating to the LLC.
Authority of Members: Under the New Law, members of a member-managed LLC are not agents of the LLC solely by reason of being a member. Instead, the LLC is entitled to file a statement of authority with WDFI to clarify the authority of its members. Statements of authority last for five years. The New Law also does not grant LLC members statutory apparent authority.
Fiduciary Duties: Under the New Law, members and managers are required to comply with the statutory duties of care and loyalty, as well as the implied contractual obligations of good faith and fair dealing. The members can create standards and methods for determining the extent of these duties by written operating agreement but, unlike under the prior LLC law, may not remove them entirely. However, enforceable waivers of fiduciary duties in existing written operating agreements will continue to be enforceable under the New Law if the waivers were enforceable under prior law. For members of an LLC, the ability under the prior LLC law to mostly eliminate fiduciary duties is a significant reason to opt out of the New Law.
Key Changes from the Prior LP Law
Liability of Limited Partners: Under prior LP law, limited partners were not personally liable for the LP’s obligations based on their limited partner status unless the limited partner participated in control of the LP. The New Law, however, eliminates this control exception. Under the New Law, limited partners are not personally liable for the obligations of the LP based on their limited partner status, even if they participate in the LP’s management or control. This consideration, which eliminates uncertain risks to limited partners, weighs in favor of not filing a statement of nonapplicability.
Fiduciary Duties: Similar to the changes described above for LLCs.
Details for Filing Statements of Applicability and Nonapplicability
Owners of a Covered Entity should carefully consider whether they want the New Law to apply to their Covered Entity. Owners of a Covered Entity who wish to preserve previously-agreed waivers or limitations on their fiduciary duties may want to opt out of the New Law. This Client Alert only summarizes several key changes to the prior laws governing a Covered Entity. We recommend a close review of the New Law when making this decision, as it will impact the rights and obligations of both the Covered Entity and its Owners. An additional consideration is there will be no established practices or judicial interpretations of the New Law as of January 1, 2023. The new Chapter 183 can be found here and the new Chapter 179 can be found here.
The Statement of Applicability form is found here. The form includes instructions for filing. A completed form may be sent via mail or emailed to WDFI at [email protected] as a PDF. There currently is no filing fee associated with this form. However, there is an option to expedite the filing for $25.00. To properly file the Statement of Applicability, the Owners must consent to the filing in the same manner as allowed for amending the Covered Entity’s operating agreement or partnership agreement.
The Statement of Nonapplicability form is found here. The form includes instructions for filing. A completed form must be sent via mail or emailed to WDFI at [email protected] as a PDF prior to January 1, 2023. There currently is no filing fee associated with this form. However, there is an option to expedite the filing for $25.00. To properly file the Statement of Nonapplicability, the Owners must consent to the filing in the same manner as required for amending the Covered Entity’s operating agreement or partnership agreement.
Please contact us at [email protected] if you have questions or would like assistance filing either a Statement of Applicability or a Statement of Nonapplicability. Attorneys and paralegals are monitoring the inbox to promptly respond to your inquires and applications. If you would like Michael Best to file a Statement of Nonapplicability, contact us on or before December 15, 2022, and provide a written certification or consent resolution showing that all necessary Owners have consented to the filing. We may also need to review other documents relating to the Covered Entity, such as its operating agreement or partnership agreement.
We will do our best to file a Statement of Nonapplicability for requests or documents received after December 15, 2022, but cannot guarantee it will be filed with WDFI by December 31, 2022. Therefore, your prompt attention to the deadlines described in this Client Alert is recommended.