Minnesota Limited Liability Companies
The Minnesota Limited Liability Company Act, Chapter 322B of the Minnesota Statutes governs the formation, operation and dissolution of LLCs in Minnesota.
Combining certain characteristics of both partnerships and corporations, LLCs are privately owned legal entities that can be formed for the purpose of earning profits, pursuing a social mission, or both, although some states require an LLC to be formed only for a “business purpose.” LLCs differ from for-profit corporations because they are formed and owned by members rather than shareholders; however, like S corporations and partnerships, LLCs are eligible for pass-through income tax treatment. This means that income and expenses are reported as though the members incurred them directly, and profits or losses are taxed at the ownership (member) level, rather than the entity (company) level.
Members of LLCs can be individual investors as well as for-profit corporations and tax-exempt nonprofit corporations. For this reason and also because of pass-through taxation which eliminates “double taxation” (the effect of taxing income at the corporate level and again when it is included in the owner’s income), LLCs are preferred over for-profit corporations as vehicles for social enterprise, especially for joint ventures between a tax-exempt nonprofit with a social change mission and a for-profit business.
LLCs are akin to partnerships because the members have broad discretion to allocate profit and loss and management powers among themselves. On the other hand, as with the shareholders of corporations, the members of an LLC can be divided into classes, each with its own economic rights, and members have limited personal liability (discussed below).
In Minnesota, LLCs have certain characteristics of corporations. Minnesota LLCs are governed by a board of governors, which is analogous to a corporate board of directors. An LLC's managers serve as the equivalent of officers in a corporation.
Assuming state laws permit formation of nonprofit LLCs, the IRS will recognize such an LLC as exempt under Section 501(c)(3) if it elects to be treated as a separate legal entity for tax purposes and its operating agreement includes the language mandated by the organizational test (purposes, distribution of assets upon dissolution, etc.) and it meets numerous requirements largely designed to guard against inurement and private benefit. These conditions will be discussed in the Nonprofit Taxation section.
In Minnesota, a LLC is formed by filing articles of organization with the Minnesota Secretary of State and paying the appropriate filing fee. An LLC is required to have a registered office located in Minnesota. The address of the registered office must be the address of a physical location; it cannot be a post office box. The LLC is not required to name a registered agent in the articles of organization. There must be at least one organizer, who must be a natural person at least 18 years of age.
The name of a LLC must be in English or any other language expressed in English characters and must contain the words “limited liability company” or the abbreviation “LLC.” The LLC's name cannot contain the words “corporation” or “incorporated” or the abbreviations of either or both words.
Minnesota authorizes the formation of nonprofit LLCs.
Management and Control
An LLC's bylaws (the term “operating agreement” can also be used) governs the management of an LLC. The bylaws or operating agreement-which is like the bylaws of a corporation, may contain provisions requiring adherence to a social purpose and such purpose and the values it embodies may be interwoven throughout the operating agreement. In LLCs with more than one member, the members can also enter into a member control agreement to agree upon the rights and restrictions governing their membership interests.
The Minnesota Limited Liability Company Act does not require the bylaws/operating agreement or member control agreement to have any specific provisions. Certain statutory default provisions can be modified by the bylaws/operating agreement or member control agreement. The bylaws/operating agreement will often address: the LLC's management structure and powers; number and qualifications of governors, appointment and expulsion provisions; members' rights and responsibilities; and rules for holding meetings and taking votes. The member control agreement will often address: the member percentage interests in the LLC; member voting; tax matters and capital accounts; admission of new members; allocations and distributions of profits and losses; rules regarding transfer of membership interests through death or divorce; and valuation of membership interest upon a member's departure from the LLC.
Limited Liability of Governors, Managers, and Members
LLC members, governors, and managers, solely as a result of that role, have no liability for the LLC's debts or obligations. The rules regarding corporate veil-piercing also apply to LLCs.
Merger, Dissolution and Term of Existence
An LLC has perpetual duration unless otherwise specified in the articles of organization. An LLC may merge with a domestic or foreign LLC, a domestic or foreign corporation, or a cooperative. The dissolution of an LLC will occur upon one of the following events: the term of the LLC's duration, set forth in the articles of organization, expires; by decision of the governors or organizers, if the LLC has not accepted any contributions; by approval of a majority of the members, if the LLC has accepted contributions; by court order; and upon the termination of any member's membership interest, if so provided in the articles of organization or member control agreement, or if the membership of the last or only member terminates and the legal representative of the last member does not cause a new member to be admitted within 180 days of termination.
An LLC offers the same flexibility in raising capital as a for-profit corporation.
Recordkeeping and State Reports
LLCs must register with the Minnesota Secretary of State once every year. The Secretary of State’s office will send a registration form to the limited liability company at its registered office. The registration is due before the end of the calendar year. The failure to file the registration form will result in administrative termination. Section 322B.373 sets forth the list of records a LLC is required to keep.
Unless it elects to be treated for federal and state purposes as a corporation, an LLC is generally not subject to separate entity-level taxation of its income under state and federal tax laws, although it is required to file an informational return. Unless a member is exempt from income taxation, usually its distributive share of membership income and loss is treated as income or loss to the member and reported on his/her/its return, regardless of whether the member actually receives the income. LLCs that have one owner are generally disregarded as entities separate from their owners. The tax-exempt treatment of nonprofit LLCs will be discussed in the section on Nonprofit Taxation.
Humphreys, Thomas, Limited Liability Companies and Limited Liability Partnerships (Incisive Media, 2009)
A Guide to Starting a Business in Minnesota, Minnesota Department of Employment and Economic Development