Do you currently own a Minnesota Limited Liability Company (LLC), or are you interested in establishing one? If so, you may wish to know what kind of ongoing maintenance is required. Whether the LLC was organized to hold real estate or other investments, run a business, or for some other purpose, certain acts must be done, from time to time, to ensure your LLC’s continued existence and limited liability protection. The following is a short summary of what must be done and should be done to keep your LLC active and registered and ensure that the LLC’s activities are insulated from your personal and other business interests.
Each year an LLC must file its annual renewal with the Minnesota Secretary of State’s office. The Secretary of State’s office will send a form to you every year. The filing is quick, easy, and free of charge (provided that it is timely filed). Be sure to complete the form and promptly mail it to the Secretary of State’s office. You may also file your renewal online at www.sos.state.mn.us.
If you fail to file your annual renewal by the deadline (currently December 31 of each year), your LLC will be administratively terminated without further notice. You may reinstate your LLC for a $45 fee, but until you do, your company name will not be reserved. Anyone may organize their company under your name in the meantime. More significantly, during this time you will lose limited liability protection until the annual renewal is filed and the reinstatement fee is paid. To avoid any issues, we recommend filing your annual renewal well before the December 31 deadline.
Minnesota Statute §322B.373 requires that records and information be made available to an LLC’s members. Though specific records are not outlined in the current statute, the former LLC statute section 322B.373 required every LLC to maintain the following records and information:
1. Name(s) and address(es), both home and work, for every member, member of the board of governors, and also for the chief manager (the LLC equivalent of a CEO)
2. Name(s) and address(es) for every holder of financial rights within the LLC, and the extent of those financial rights held. In most cases these are the same individuals or entities listed in 1 above, however this could include certain creditors or individuals who have received membership units through an assignment of financial rights;
3. Articles of Organization, as well as any amendments to the Articles of Organization. If your LLC was established by our office, these will be included in your company minute;
4. Any and all current and effective by-laws. If your LLC was established by our office, these will also be included in your company minute book;
5. Records of member proceedings over the last 3 years (membership meeting minutes). If your LLC was established by our office, these will be included in your company minute book;
6. Records of the Board of Governors’ proceedings over the last 3 years (Board of Governor Minutes). If your LLC was established by our office, these will be included in your company minute book;
7. Any member control agreement;
8. A statement of all contributions made to the LLC (sometimes this is a separate document, however, it can often be found within initial meeting minutes, initial by-laws, or within a member control agreement);
9. Any contribution agreements that are in place;
10. Any restatement of value of previously accepted contributions;
11. Any agreement authorizing and/or accepting contributions;
12. Any certificate of agreed value (usually part of the member control agreement);
13. Any reports made to members within the previous 3 years (i.e., appraisal reports, company projections, etc.);
14. Any written consent of a member;
15. All required financial statements required under Minn. Stat. § 322B.376 (Financial Statements); and
16. All tax returns and/or tax reports for the LLC for the last 3 years (this includes both federal and state returns and reports)(our office recommends that you maintain tax records going back at least 6 years).
All of the above documents and records were previously required to be maintained, saved, and made accessible to members upon demand, and though Minnesota law no longer specifically requires all of the above records to be maintained by the company, we still recommend that your company maintain them. While it may seem that keeping these records is onerous, it is much easier than it appears. Many of these records have already been drafted or are drafted shortly after establishing your LLC (i.e., articles of organization, operating agreement, and contribution agreement). Others are likely covered in your annual minutes (i.e., items referenced above in items 5, 6, 7, 8, 9, and 16) (Regular Meetings and Minutes).
Though failing to keep these records will not subject your LLC to termination, it may expose your LLC to lawsuits by current or former members. The failure may also place your limited liability protection in jeopardy, which is the very purpose of establishing an LLC. A lack of recordkeeping is indicative of form over substance, meaning the LLC is not being operated as a separate, legal entity, and is more of a fiction than a reality. For these reasons, we recommend that you regularly update, maintain, and keep your company records accessible.
In contrast to the former LLC law, the Revised LLC Act does not expressly mandate that LLCs issue financial statements to their members. Even so, we recommend that financials are provided or made available. The former law is instructive in how an LLC should manage its financial affairs. Minnesota Statute §322B.376 previously required that every LLC prepare annual financial statements within 6 months of the end of their fiscal year. At minimum, the financial statement should include an end-of-year balance sheet and income statement. There is no required accounting method that must be used in preparing the financial statements. Under current law, any member has the right to request and receive the company’s most recent financial statement upon 10 days’ written notice.
K-1 forms showing distributions made to members for the past tax year must also be prepared. Unlike corporations, whose income is taxed at the corporate level, many LLCs are pass-through entities and tax is paid directly by the members upon distribution.
Regular meetings of the members, manager(s), and/or Board of Governors are not required by law, but may be required under the Articles of Organization or Operating Agreement. Notwithstanding, we strongly recommend that meetings take place at least annually. This will help ensure that your company formalities are being followed and will protect against claims by creditors attempting to pierce the corporate veil.
An annual meeting should include at a minimum a discussion of several key issues. First, at each meeting, the members should nominate and elect the Board of Governors and the manager(s)/officers of the company, even if no changes are being made. Again, this ensures that your company is observing its corporate formalities. Second, the members should discuss general actions taken by the company and the Board of Governors since the last meeting was held, including the company’s financial picture. Finally, if there are any other major actions that the company is contemplating, these items can also be discussed and voted on at the annual meeting. Following each meeting, any items discussed should be memorialized in company minutes. Our office is happy to assist you in the holding of your annual meeting and the drafting of company minutes upon your request.
Minutes are notes detailing the items discussed and/or voted on at company meetings. Normally, minutes are taken and kept by the company’s secretary and should include the date and location of the meeting, a summary of each act which was voted upon, and a general and concise summary of anything else discussed. They need not be in any specific format. Though minutes, like meetings, are not technically required by law, the failure to draft minutes may be indicative of corporate formalities not being observed, which, ultimately, could lead to your LLC forfeiting its limited liability protection.
There are several other ways to ensure that your LLC receives the full protection afforded under the law. One such item is the use of a limited liability signal in your company’s name. For example, “XYZ, LLC,” utilizes the signal LLC (Limited Liability Company) in its name. The use of such signal is required by statute (Minn. Stat. §322B.12), which places the public on notice that the company is asserting limited liability protection. As such, your company letterhead, forms, contracts, etc., should bear the LLC signal following its name.
In addition, when conducting company business, you should make it apparent that you are doing so on behalf of the LLC—not in your personal capacity. Confusion abounds if this isn’t made clear, and could subject you to personal liability. If, for instance, you enter into an agreement in a way that it makes it appear that you are doing so in your personal capacity, you will not enjoy the limited liability protection afforded to your company. In such a scenario, your personal assets could be open to future claims made by creditors.
To avoid this predicament, you should sign all agreements under your official title (e.g., “President of XYZ, LLC” or “Secretary of XYZ, LLC”), or by indicating that you are signing “On Behalf of XYZ, LLC” (e.g., “John Doe, On Behalf of XYZ, LLC”). Again, this lets the world know that you are claiming limited liability protection and entering into the agreement on behalf of the company. Failure to do so may put your personal assets in jeopardy and in reach of creditors.
Finally, and, most importantly, you MUST keep your company funds separate from your personal funds. Commingling company and personal funds is one of the biggest and most common mistakes that owners make. Courts have consistently held that if you treat your company’s finances as your own, then the rest of the world may do the same (i.e., creditors can go after both company and personal assets to satisfy unpaid debts). Whether there are multiple owners or you are the sole owner in the company, you cannot use company funds to pay personal expenses. Should you desire to use company funds for personal expenses (e.g., mortgage, gas, groceries), you must first make a distribution or pay them out as wages. You must do this even if it is an inconvenience to you. If you take a shortcut to put money from your company into your pocket, then your creditors will likely be able to do the same to satisfy their claims out of your personal bank account.
While this summary does not give you all of the answers or cover all of the intricacies that come along with owning a new company, when combined with the Articles of Organization and the Operating Agreement, you should be able to successfully maintain and operate your company for years to come. As always, should you have any questions, comments, or concerns regarding your Minnesota LLC, or any other issue, please do not hesitate to contact our office, and we will do our utmost to provide you with the answers and guidance you need.