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What you don't know can sometimes hurt you...

Recently, one of my business clients gave me an impressive three-ring binder containing a set of documents for his recently formed limited liability company. In December 2017, he had gone online and ordered it from one of the popular websites offering low cost business formation.

The binder was embossed with the name of his company on the spine. Very nicely done. I admit that I went online to see what it cost him. Based on my research, it cost $329 plus the $155 Minnesota filing fee.

Not a bad price, either.

But…

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There’s always a “but…” isn’t there?

When I looked at the documents contained inside, I found a Member Control Agreement for an LLC. That caught my eye right away since the term “Member Control Agreement” is typically associated with older legislation here in Minnesota.

In 2015, Minnesota adopted a form of the Revised Uniform Limited Liability Company Act which was passed as Minnesota Statute 322C. The legislation was a significant departure from Minn. Stat. 322B, the state’s original limited liability company statute.

Implementation for the new statute was staggered. Any new LLC formed in Minnesota on or after August 1, 2015 would be formed under 322C. All LLCs formed prior to that date would have been formed under 322B. On January 1, 2018, Minn. Stat. 322B would be repealed and any LLC existing at that time would be converted automatically by the State to a 322C LLC.

The “Member Control Agreement” is part of the 322B paradigm. Under 322C, the Operating Agreement is the governing document for an LLC. The two are not identical, however. A 322C Operating Agreement controls and defines an LLC’s operations to a much greater degree than does a 322B Member Control Agreement.

Bearing in mind that my client purchased this LLC formation package in December 2017, it would be a reasonable expectation that the governing document included in the package would be based on the same statutory authority as the LLC he formed. That is, since the LLC he formed was a 322C LLC, the governing document should also have been based on the same statute.

It wasn’t.

The “Member Control Agreement” was based on –and specifically referenced—Minn. Stat. 322B, a statutory section that was set to be repealed in under four weeks from the date the LLC was formed.

While that sounds bad enough by itself, it is actually worse. Remember that all LLCs formed on or after August 1, 2015 were formed under Minn. Stat. 322C. Essentially, from August 1, 2015 until at least December 7, 2018 when my client purchased his LLC formation package, that website was selling the incorrect governing document to every Minnesota LLC it set up.

That’s over three years! Who knows how many hundreds of LLC may be affected by this.

How big a deal is this? It depends on the individual circumstances of each business. For some, it may not be anything at all. For others, it may be a significant problem.

If you or anyone you know used an online business formation service to form a Minnesota LLC in the past 3 ½ years, it would be a good idea to have an attorney review the documents. Doing so after a problem comes up won’t help too much.

Sometimes, what you don’t know can hurt you.