Businesses need to be aware of new under-the-radar changes in how Minnesota LLCs are set up
After I graduated from the University of Minnesota but before I went to law school, I worked in our family business in St. Paul.
My father started a small advertising and graphic arts business which grew out of his experiences as an advertising executive with an ad agency back in the Mad Men era—my parents were even named Don and Bette!
I worked beside my dad, managing accounts and brokering work from art studios, retouchers, photographers and illustrators. Dad made me vice president, for what that was worth, and put me in charge of the checkbook; I paid the bills and managed payroll. It was this experience that gave me the idea that I could help other businesses and led me to apply to the night program at William Mitchell College of Law.
As an attorney, I’m proud to be a trusted adviser to a number of Minnesota business clients; as co-owner and managing partner of Minneapolis-based Henson & Efron, I essentially run a legal business, which has allowed me to understand the problems, issues and yes, the occasional joys of having a stake in ownership.
Currently, I’m concerned that many owners of businesses that are formed as LLCs could get caught flat-footed by recent changes in the Minnesota law. Under some circumstances the updated statute governing LLCs could allow people who own the majority of their business to get outvoted on key decisions by people who hold a small stake in their LLCs.
This could have serious financial implications for those LLC principals.
Back to my job with dear old dad at DA Opdahl and Associates. Imagine if he had it set up as an LLC and had given me 10% of the business. Just to keep things even, like my parents always strived to do, imagine that they had given my sister the same, leaving Dad, the founder and CEO, with 80%.
Under today’s LLC arrangement, my sister and I could have outvoted him with two votes to his one. In the case of cash distributions, we would be eligible to take the same amount as our father. We might have even had the majority votes to dissolve the business.
I think that would have outraged even the stoic Norwegian ad man. “Are you sure you have that right, son?” he would have asked me.
Let me get technical about the shift in the way Minnesota LLCs are established.
Prior to the 2015 statutory revisions, Minnesota LLCs were automatically set up under the corporate model. The person who put the most money into the LLC had their stake weighted; as a result, they wielded the the most power with voting rights and capital distributions.
Under the new law, LLCs default into a partnership structure. It’s a fine distinction, but one that can alter voting rights. The new statute gives all members in an LLC one vote unless the members agree otherwise.
These subtle shifts in the new statute give me concern for my clients who are thinking of using the LLC model in the future.
Business owners who are forming a new LLC and want to bring family members in or incentivize employees with an equity stake need to understand the implications of their actions and structure their entities carefully.
Few business owners set up an LLC anticipating a conflict in the future, where everyone takes opposing views, goes to their corner and takes an aggressive stand.
But we’ve all seen these disputes erupt.
I’m concerned for business owners who might not realize the built-in vulnerabilities in the way their LLC is established. They could find out too late that they are not in the position of strength that they thought.
I’ve long believed that LLCs make good sense for many businesses; the flexibility for ownership and income tax treatment often make it a superior option.
How is your LLC set up? I’m advising my clients to carefully consider the implications of the partnership model. For some, it’s the best option but for others, the corporate model may make more sense; it’s still an option, but businesses have to know to ask for it.
We’re working with businesses and also with accountants who help structure LLCs to provide guidance with Minnesota’s statutory changes. We believe some advance planning can prevent hassles and headaches for them down the road.
Clark Opdahl is a business law attorney, advising and representing companies and businesses in a wide variety of transactions and matters. He has been managing partner at Henson & Efron since 2008.