Samuel C. Wisotzkey
Does your company sell goods or provide services to Wisconsin Limited Liability Companies? Does your company extend credit, or do business of any sort, with Wisconsin LLCs? Chances are the answer is “yes,” because Limited Liability Companies are quickly becoming the most prevalent form of organization in Wisconsin. In 2020 alone, more than 52,000 entities were organized in Wisconsin, and over 90% of those entities were LLCs.
If you do business with a Wisconsin LLC, you need to understand new changes under the comprehensive update to Wisconsin’s LLC statutes known as Act 258, which became effective on January 1, 2023. While Act 258 also updated Wisconsin’s statutes governing General Partnerships, Limited Partnerships, Non-Stock Corporations and regular Corporations, the law’s changes will be felt the most in connection with LLCs.
One goal of Act 258 was to improve efficiency and consistency among Wisconsin laws governing various types of entities. Another goal was to update Wisconsin law and make it consistent with a Uniform Limited Liability Company Act that has been embraced by about 20 other states (Wisconsin’s old LLC law had remained largely unchanged for almost 20 years). Aligning Wisconsin LLC law with the law of those other states creates a larger pool of court decisions that can provide guidance on issues that might not be directly addressed or resolved by the Uniform Law itself. This additional guidance should help create more certainty when making LLC business decisions, especially given that there were less than ten (10) court decisions regarding Wisconsin’s old LLC law in the more than 30 years of the law’s existence.
However, the law’s changes also have important implications for anyone that engages in business with a Wisconsin LLC.
In particular, Act 258 changes the law regarding establishing who has authority to act on behalf of or contractually bind an LLC. Under the old law, you perhaps could assume that a member of an LLC had the authority to bind the LLC as an agent of the company. That is no longer the case—Act 258 specifically provides that status as a member alone does not make that member an agent of the LLC. Therefore, in trying to determine who might be an authorized agent of an LLC, parties have to understand two additional changes in Wisconsin law and how to deal with these changes.
The two changes are: (1) LLCs no longer have to identify in their Articles of Organization whether they are member-managed or manager-managed, so more due diligence is required to determine who has authority to act for the LLC; and (2) LLCs may file (but are not required to file) a Statement of Authority, setting forth the extent of authority for either specific individuals or particular positions within the company. While these new developments are especially important in real estate transactions, they can also come into play in the context of credit applications or in the ordering or contracting process. Thus, creditors and other parties doing business with Wisconsin LLCs must understand where to find this new information, and need to consult with competent counsel when there is any doubt about who has the authority—or the extent of someone’s authority—to bind the LLC. These steps will prevent unwelcome surprises when it comes time to enforce the obligations of your LLC business partners.
Under the old LLC law, when an LLC was formed, the Articles of Organization filed with the Wisconsin Department of Financial Institutions, or “DFI” (www.wdfi.org) were required to state whether the LLC would be managed by its members or if management was vested in managers of the organization. This requirement allowed creditors to search for a Wisconsin-formed LLC (https://wdfi.org/apps/CorpSearch/Search.aspx), navigate to the Historical Information Section for a company, and request copies of and review the Articles and any amendments. A creditor could then determine whether it could rely on its dealings with the members or if it needed to insist on verifying a person’s status as a manager of the organization.
Under the new LLC law, however, the LLC’s Articles of Organization are no longer required to specify whether management is vested in the members or in managers. An LLC can make that election in an operating agreement, but operating agreements are not filed with the DFI, so this information may not be as readily available as it was under the old law.
One justification for eliminating this requirement from the Articles of Organization is that amending the Articles was too cumbersome if an LLC wanted to change the form of management. This extra administrative step is now eliminated.
While eliminated from the Articles of Organization, Act 258 does require an LLC’s Annual Report to name at least one member if the LLC is member-managed, or one manager if the LLC is manager-managed. These Annual Reports are contained in the same Historical Information Section for a company on the DFI website, and there is an online-ordering process available for requesting such documents.
However, creditors and other parties must take care to review the most up-to-date Annual Report, and also understand that members or managers could change after the Annual Report is filed. There is no obligation to amend an Annual Report that was accurate when filed. Therefore, further investigation and assurances must be obtained to verify that any member or manager listed in an Annual Report has the authority to act for the LLC. For example, especially in a significant transaction, a creditor may want to insist on receiving full copies of an LLC’s operating agreement and all amendments, and to review those documents for provisions on authority to bind the LLC.
In addition, creditors and others doing business with an LLC must review DFI’s records for any Statement of Authority filed by the LLC.
The Statement of Authority is a new document that a Wisconsin LLC can file with the DFI under Act 258. If filed, the Statement of Authority may specify particular authority for a person holding an office (such as president, or managing member), or it could specify limitations on that officer’s authority. The Statement of Authority could also specify the authority for a named individual, or limits on the authority of the individual.
Under Act 258, the authority in the Statement could relate to a person’s ability to enter into transactions on behalf of or to bind the LLC, or to sign instruments transferring real property held in the name of the company. Or, the Statement could limit a particular officer’s or individual’s ability to transfer real estate or otherwise bind the company.
Creditors and others doing business with an LLC must conduct a careful search of the records on file with the Department of Financial Institutions for any Statement of Authority, which should be stored in the same Historical Information Section for companies on the DFI’s website. If such a Statement is on file, the creditor must obtain a copy and review the Statement to see how it might impact dealings with the LLC and its officers, members, or managers.
In addition, if a contemplated transaction involves a significant contractual relationship or a substantial dollar amount, businesses should consider insisting that the LLC file a Statement of Authority to confirm the specific authority of a signatory to bind the LLC.
Where real estate is involved, parties have additional protections in dealing with an LLC if a Statement of Authority is filed with DFI and recorded with the register of deeds where the property is located. In our view, whenever an LLC is signing real estate-related documents, parties should insist that a Statement of Authority is filed and then recorded in the real estate records confirming the authority of any person signing on behalf of the LLC. For example, if a creditor is going to obtain a mortgage on real estate held by an LLC to secure an obligation, the creditor should require that the LLC file a Statement of Authority with DFI and then record the Statement with the applicable Register of Deeds particularly identifying and confirming the authority of the person to sign the mortgage on behalf of the LLC.
Act 258 automatically applies to all Wisconsin LLCs formed on and after January 1, 2023. The law also applies to Wisconsin LLCs organized before that date, except that an existing Wisconsin LLC had an option to file an opt-out statement no later than December 31, 2022, to remain governed by the prior law. If a search of an LLC’s records reveals such an opt-out statement (technically, a Statement of Nonapplicability), parties should consult with knowledgeable counsel to consider the implication of that election.
Businesses and creditors engaged in transactions with Wisconsin LLCs must include a review of all available records with the Department of Financial Institutions as part of their critical, advance due diligence. Parties must understand how Act 258 changes the way of establishing who has authority to contract or otherwise act for and bind an LLC to any particular transaction. Companies must also be prepared to use the new Statement of Authority for an LLC to provide further protection in appropriate circumstances, particularly where real estate transactions are involved.
If you have questions or would like further assistance in reviewing an LLC’s corporate records, including Statements of Authority, or would like to learn more about using Act 258 to your advantage, contact KMK Attorney Samuel C. Wisotzkey at email@example.com or (414) 962-5110.