Wisconsin's New LLC and Partnership Laws - What you Need to Know

Wisconsin's New LLC and Partnership Laws - What You Need to Know

Wisconsin has recently signed a new law into effect that will change some of the ways a limited liability company or LLC is formed and operates in the state. Any limited liability company formed after January 1, 2023, will be subject to the new law. A business owner interested in forming a new LLC or someone who is interested in becoming a business owner will need to be aware of the new law and how it will affect their long term. While this is not an exhaustive article and certainly not a substitute for legal advice, it does offer a basic primer on the changes and how they affect Wisconsin LLCs and partnerships. Read on to find out more about Wisconsin’s new business law.  

How and when the new Wisconsin LLC law can apply:

The new law will apply to any limited liability company formed on or after January 1, 2023. The new law can also apply to LLCs formed before January 1, 2023, unless the LLC does one of the following:  

• the LLC chooses to be governed by the preexisting law and files a statement of non-applicability with the Wisconsin Department of Financial Institutions on or before December 31, 2022, OR  

• The LLC chooses to be governed by the new law that takes effect on January 1, 2023, before the new law’s effective date, filing a statement of applicability with the Wisconsin Department of Financial Institutions before the new law takes effect for every LLC.  

So, what that means in plain language is that the LLC can either decide to be excluded entirely from the new law, or the LLC can choose to be governed by the new law early, depending on what the LLC “wants.” A statement of applicability is Wisconsin corporation form 399 or 599. A statement of non-applicability is Wisconsin corporation form 398 or 598. These forms can be found online for review. If you have questions about the forms or whether you should elect to sign one or the other, you should discuss the situation with an experienced Wisconsin business law attorney who can evaluate your needs and provide meaningful advice.  

So now that we have covered how and when the new Wisconsin LLC law applies, let’s explore the changes in the law and what they mean. Wisconsin Chapter 183 is the governing law for a limited liability company in Wisconsin.  

Changes to the General Provisions  

All chapters in state statutes start with some general provisions that create a foundation for the specific provisions that follow them. They give definitions and scope to the law in the chapter.  

Some Wisconsin LLCs choose to have a document included in their incorporation called an operating agreement. An operating agreement is simply a written plan for how the business will function and how it will use its money. If you have a small, simple LLC it is possible that you did not elect to draft and file an operating agreement. If you have an operating agreement or plan to create one when you form an LLC, then this change will be relevant to you.  

The new Wisconsin LLC law has made changes to the general provisions in Chapter 183, and one of the “big” changes is that the term “operating agreement” has been significantly redefined, both in how the operating agreement is created and what it can do.  

The new law allows an operating agreement to be an oral agreement, an implied agreement, or an agreement based on an examination of the company records. It can also be a combination of all these types of agreements. This new change has some positives and negatives, though. Although the law now allows that the operating agreement can be something other than a written document, that does not mean that it is something the creator of an LLC should do or rely on. There is no substitute for a clear and comprehensive agreement that is laid out specifically in a formal written document. What this law will allow is for a court to examine an issue between LLC members or with a sole member of an LLC and see if there is actually an operating agreement that the LLC must adhere to, even if there is no writing. The new law also chose to create a definition for a written operating agreement by stating that it is “set forth in writing.” The written operating agreement can be the whole of the operating agreement or just a part of the operating agreement.  

The general provisions also set forth new duties for a written operating agreement that an LLC should be aware of. The written operating agreement can now change certain aspects regarding the duty of loyalty. Broadly speaking, the duty of loyalty is where members of the LLC are required to place the interests of the business over their own personal or other business motives when making decisions for the business. The new law does not allow the written operating agreement to change any provisions related to the duty of good faith and fair dealing, and these fiduciary duties remain untouched.  

Changes to the Formation of a Limited Liability Company in Wisconsin

When you form an LLC in Wisconsin, the Wisconsin Department of Financial Institutions requires that you file articles of incorporation, which contain some very specific terms. The current procedure does not offer any flexibility when you are creating and formalizing your Wisconsin LLC. The new law will allow that the documents filed to create the company and what they contain will be broader, meaning that you can customize your LLC so that, if you and the other members decide to make changes down the road, you can, with less paperwork involved. While this might seem like a quick, simple change, it actually could mean more work on the front end of creating your business entity. You will need to thoughtfully create terms and powers before the possibility of using them becomes a reality in order to avoid confusion or non-compliance later on in your business endeavor. As always, it is the best possible choice to discuss what you want to do and what you want to be able to do with an experienced Wisconsin business law attorney.  

Changes to Apparent Authority

Under the current law, members or managers of a Wisconsin LLC have what is known as “apparent authority.” Apparent authority is when it is assumed that a member or manager of the LLC has the authority to conduct business on behalf of the LLC. In the legal world, that means that the member or manager of the LLC is considered an “agent” of the LLC.  

The new law requires that a statement of authority be created and filed for the LLC. The new law does not recognize apparent authority. A statement of authority is a document that is filed with the state alerting others that the parties named in that statement have the authority to conduct business on behalf of the entity. The authorized party can sign contracts, access funds, and make decisions that will affect the business. The statement of authority can also narrowly tailor the powers of the agent, excluding the agent from certain powers. If the LLC member or manager does not want that power, they can file a statement of denial if they are named in the filed statement of authority as having the power to file.  

Changes to Members and Managers of the LLC

Under the current law, a member must make a contribution in order to be in the LLC. The new allows members that do not make an economic contribution. The new law does not change the voting power of a member. However, the members’ voting power will remain the same as under the old law, which means that the members’ voting power is proportional to the value of their economic interest in the LLC. The voting power of a member can be different if there is a provision addressing the same in a written operating agreement.  

The new law will also include provisions relating to the duties owed to the LLC by its managers and members. The duty of loyalty has already been explained earlier in this article but to review, it is a duty not to compete with the LLC, not to put personal or other business interests ahead of the LLC, and to account to the LLC about LLC finances. The members and managers also owe the LLC a duty of care, that is, not to engage in any willful misconduct, use the LLC for personal profit or criminal activity, and to deal fairly with the LLC and the other members.  

Changes to Dissociation

Dissociation by a member of an LLC can be voluntary or involuntary. Dissociation simply means that that member leaves the LLC.  

The new law has made changes to how dissociation can be identified. The national law has what is known as “wrongful dissociation.” Under national law, dissociation is only “wrongful” if it goes against the terms of the written operating agreement. The new law in Wisconsin allows that the LLC may seek a judicial order to dissociate a member if certain elements are present. The member must have committed a material breach of the operating agreement, or the member engaged in willful misconduct.  

Changes to Dissolution and Winding Up of Business

Dissolution is when the company is going to be dissolved. Winding up of business is the steps a business takes to finalize its affairs during the dissolution process. Each state has its own set of laws governing dissolution and winding up.  

The new LLC law in Wisconsin has established a ladder of priority that the LLC must follow in the process of winding up before the company is dissolved. A large part of winding up a business is paying the debts of the business. The priority under the new LLC law is that creditors of the business are paid first, then any distributions that were approved but not made prior to the dissolution process beginning, then distributions to members and dissociated members in proportion to whatever economic interest they hold in the LCC and finally, anything left over will be divided among the members and dissociated members in proportion with their interest in the LLC unless the written operating agreement says otherwise.  

Changes to Actions by Members

The new LLC law has made significant changes to how it governs the actions of members of the LLC. Once the new law takes effect, the actions of members will be governed by rules that look more like the rules that govern regular corporations in the state of Wisconsin.  

Changes to how Foreign LLCs can operate

A foreign LLC can operate in Wisconsin. An example of a foreign LLC would be a company created in Iowa in accordance with the requirements of Iowa law that governs LLC formation and operation. LLCs that are created in Wisconsin are referred to as domestic LLCs. The new LLC law allows foreign LLCs to be covered by their domestic law in regard to their internal operations.  For more information read our article, How to Move Your Corporation or LLC to a Different State.

The New LLC law has also made a significant change to how a Wisconsin LLC can handle domestication, mergers, interest exchanges, and conversions:  

The new LLC law has also made significant changes to how a Wisconsin LLC can conduct actions like a merger, a conversion, domestication, and interest exchanges. In order to understand how the law applies, let’s break each action down.  

Merger: two LLCs can make the decision to merge as long as they file the appropriate paperwork with the state. Once the merger is complete, one of the LLCs will cease to exist, and all of its property and financial assets will belong to the remaining LLC.  

Interest Exchange: a member of an LLC wants to exchange their membership interest in the LLC for something of value.  

Conversion: the LLC wants to convert into a different type of business entity, for example, an S-corp.  

Domestication: the LLC wants to change to governing law that the LLC currently uses to the law of a different state. It is also sometimes referred to as a conversion.  

Specified material adverse effects: in order to understand what the new LLC law is saying when it refers to “specified material adverse effects,” it means that the proposed action would materially increase the members’ current or potential obligations to the LLC,    

The new LLC law requires that any member of an LLC who wants to engage in any of these actions may not do so if the planned action would cause a specified material adverse effect OR disparate treatment of another LLC member. There are, of course, exceptions to this requirement. If the member who would be affected either directly consents to the action OR the written operating agreement already provided for the situation and the member who would be affected already consented to the written operating agreement.  

The new Wisconsin LLC law takes effect on January 1, 2023, but it could be practical now for companies who would like to start abiding by it. As always, if you have concerns about the new law and how it currently or potentially could affect your business, it is always a good idea to consult with your Wisconsin attorney in order to get out ahead of any potential problems that you may encounter. If you are looking for help, feel free to give O’Flaherty Law a call.  

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