How to Form an LLC in Minnesota!

Forming an LLC in Minnesota can provide a number of legal benefits.

Freedom of Contract

The Minnesota LLC Act gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses in an LLC agreement or a document the Act calls a “member control agreement.”  This gives members contractual flexibility to adapt their income streams and risks of loss to further their broader asset management plans.

Perpetual Duration

The Minnesota LLC Act provides for an LLC’s unlimited life.  Section 322B.20 states that if the articles of organization do not limit an LLC’s existence to a specific time period, the LLC’s existence is perpetual.  An LLC’s existence can therefore outlive its members’ lifetimes.

Benefits for Business Partners

The Act enables members to create classes of membership.  An LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests.  Sections 322B.155 and 322B.346 state that when a class of members has the right to vote on a matter, or when the class does not otherwise have the right to vote but a proposed matter would change the rights or preferences of the class, the matter is not approved unless a majority of the class approves it.  By enabling classes of membership, the Act facilitates everything from complex, high-dollar-volume transactions to succession planning in family businesses and estate planning by gifts of non-voting interests.

The Minnesota LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  It requires LLCs to have at least one “governor”—which is very similar to the “director” position of a corporation—a “chief manager,” and a treasurer.  (However, one natural person may fulfill all three roles.)  Sections 322B.663 and 322B.69 establish fiduciary duties for governors, chief managers, and treasurers by requiring them to act “in good faith, in a manner [they] reasonably believe[ ] to be in the best interests of the limited liability company, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”

Section 322B.663, however, provides the articles of organization or a member control agreement may eliminate or limit monetary liability for breaches of fiduciary duties except for (1) breaches of the duty of loyalty to the LLC or its members; and (2) “acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law.”  In addition, section 322B.666 provides a “safe harbor” to facilitate contracts and transactions between an LLC and one or more of its governors, or an entity in which they own an interest, if the contracts or transactions meet minimum disclosure, approval, or fairness requirements.  These rules give majority members, the LLC, and its governors certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

Protections Against Unwanted Parties

The Minnesota LLC Act allows members to protect their control of an LLC.  It distinguishes between a member’s “governance rights” and “financial rights.”  Sections 322B.31 and 322B.313 provide that a written agreement between members and an LLC may restrict a member from assigning either or both the member’s governance rights and financial rights.  If the written restriction “is not manifestly unreasonable under the circumstances and is noted conspicuously,” then it “may be enforced against the owner of the restricted financial rights or a successor or transferee of the owner.”

The Act provides that “a member may, without the consent of any other member, assign governance rights, in whole or in part, to another person already a member at the time of the assignment.”  But if the assignee is a non-member, the assignee cannot become a member or exercise the governance rights unless the non-assigning members give unanimous written approval.  Nevertheless, “a member may grant a security interest in a complete membership interest or governance rights without obtaining unanimous written consent from the non-granting members.”  If a secured party attempts to take ownership of the governance rights or assign them to a third party, then the unanimous written approval requirement applies.

The Act provides that if a member transfers his or her financial rights, the transferee receives “only the share of profits and losses and the distributions to which the assignor would otherwise be entitled.”  Section 322B.31 states the transfer of financial rights does not “dissolve the limited liability company and does not entitle or empower the assignee to become a member, to exercise any governance rights, to receive any notices from the limited liability company, or to cause dissolution.”

Creditors Only Get Passive Rights, Not Control Rights

If a judgment creditor of a member obtains a charging order against the member’s membership interest, “the judgment creditor has only the rights of an assignee of a member’s financial rights.”  Furthermore, a charging order is a judgment creditor’s “sole and exclusive remedy.”

Here are the steps you will need to follow to successfully set up an LLC in Minnesota.

Step 1. Choose a Name

Minnesota law has a few requirements for LLC names. First, the name must include “LLC” or “limited liability company” and be distinguishable from all domestic and foreign business entities qualified to do business in Minnesota. The name must also not imply that the LLC is doing any business not authorized by law, or contain the words “corporation” or “incorporated.”

Step 2. Appoint a Registered Agent in Minnesota

A Minnesota LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as a Minnesota registered agent.

Step 3. File Articles of Organization

To officially exist in the eyes of the State, an LLC must have an organizer over 18 years old file Articles of Organization with the Secretary of State. These must include the name of the LLC, the name and address of the LLC’s registered agent, the name and address of the organizer(s), and a statement of the period of existence for the LLC, in addition to any optional provisions that the organizer wants to include. This is sent to the Secretary of State with a $135 payment ($100 organization fee + $35 filing fee).

Step 4. Prepare Bylaws

Unlike most states, Minnesota law refers to the documents governing an LLC’s affairs as bylaws or member control agreements. While not required by statute in Minnesota, we recommend that your LLC have a written document that will govern its affairs.

There are some additional steps you will need to take after you form your Minnesota LLC to finish setting up and maintaining your business.

Get an EIN Number

Minnesota LLCs that will employ people or have multiple members will need an EIN from the I.R.S. to be listed on tax returns. This can be done through the I.R.S. or an incorporation service.

File Annual Reports

While Minnesota does not have an annual fee for LLCs, it does require annual report filings. This report must contain the name of the LLC, the name and address of the registered agent, the name and address of the person managing the LLC, and an email address for the Secretary of State to send notices to.

Foreign Qualifications

An unusual aspect of the Minnesota LLC Act is its penalties for failing to obtain a Certificate of Authority for a foreign LLC.  This is sometimes called “qualifying” a foreign LLC to do business in the state.  A foreign LLC is an LLC that is formed under the laws of a state other than Minnesota.

In most states, a foreign LLC may defend itself in state court if it has not qualified to do business in the jurisdiction, but it may not be a plaintiff in state court until it has qualified.  Many states also require a foreign LLC to pay the taxes and fees that it would have paid if it had qualified when it first started doing business in the jurisdiction.  But Minnesota also charges a civil penalty of up to $5,000 against the LLC itself and up to $1,000 against each member who authorized, directed, or participated in transacting business without a certificate of authority.  Because an application for a certificate of authority costs only $185, foreign LLCs should qualify to do business in Minnesota if there is any doubt about their status of “doing business” in Minnesota.