Guest Blog by Wayne W. Carlson, Michael S. Raum & Elizabeth L. Alvine, Fredrikson & Byron
The state of North Dakota recently adopted the Revised Uniform Limited Liability Company Act (RULLCA), which directly affects the law governing LLCs. Minnesota has already adopted this change. This is important as, over the last 15 years, LLCs have become the dominant form of business entity in the state of North Dakota.
As a reminder, LLC stands for limited liability company. It’s a form of business entity that combines the pass-through taxation generally found in a partnership with the limited liability of a corporation.
The RULLCA made some pretty substantial changes to the law governing LLC’s. Specifically, there are two points in particular that you need to take notice of:
First, RULLCA imposes a default management structure, which is equal among all members. What this means is that, unless they have an agreement to the contrary, all members of the LLC are given an equal voice in management, no matter their level of ownership interest. This is a distinct difference from the prior act, which called for voting rights distributed in proportion to ownership interest, similar to that of a corporation.
Second, RULLCA’s default rules require making interim distributions on an equal, per capita basis for all members. This means that, if an LLC had two members, it would distribute $100 50/50 between the two, regardless of how much capital each contributed, unless the LLC had an agreement to the contrary. Again, this is a distinct difference from the previous act, where interim distributions were made in proportion to the amount of capital contributed by each member.
So are you stuck with these default rules of RULLCA? Well, it depends on one thing. Does your business have an operating agreement? New LLCs which have operating agreements will be able to operate under almost any set of rules the owners choose.
If you don’t have an operating agreement, however, it’s a different story. This is a typical scenario for many LLCs formed without legal assistance and guidance. Without an operating agreement, RULLCA essentially becomes your operating agreement and now governs the management structure and interim distributions of your entity.
The moral of the story is two-fold. One, keep these rules in mind when forming an LLC or working with an LLC, especially if they don’t have an operating agreement. Second, there are a lot of DIY tools when you’re forming an entity. It’s important to have a trusted business advisor alongside you on this journey to help ensure you have the proper protections and safeguards in place.