Many Wisconsin family farms operating as limited liability companies may be surprised to learn that the law governing their entities has changed.

While the changes are numerous, and a general understanding of all such changes is warranted, this article discusses three changes that are likely to have the biggest impact on family farms organized as LLCs in Wisconsin.

Background and Application

The new Wis. ​Stat. chapter 183 became effective Jan. 1, 2023, and represents a significant departure from established Wisconsin LLC law on certain topics.

In April 2022, Gov. Tony Evers signed 2021 Wis. Act 258 to repeal in its entirety the then-current law relating to limited liability companies and adopt the Wisconsin Uniform Limited Liability Company Law (WULLCL).¹

The WULLCL has kept certain Wisconsin-specific provisions governing LLCs, but also represents a fundamental shift from certain areas of longstanding Wisconsin LLC law.

The WULLCL applies to all limited liability companies formed on or after Jan. 1, 2023, and to those limited liability companies that did not “opt out” of the applicability of the WULLCL before Jan. 1, 2023, by filing a statement of non-applicability with the Wisconsin Department of Financial Institutions (WDFI).

Any limited liability company that didn’t take affirmative action to opt out of the WULLCL automatically became governed by the WULLCL on Jan. 1, 2023.

Charging Orders

Wisconsin’s WULLCL dramatically changes the liability protections afforded to sole-member LLCs in these ways:

General Treatment:

When a creditor obtains a judgment against an individual holding an interest in a limited liability company (whether sole-member or multi-member), the court may issue a “charging order” against that member’s interest in the limited liability company until the judgment amount is satisfied.

This charging order acts as a lien against the debtor-member’s transferrable interest in the limited liability company. It requires the limited liability company to pay to the creditor/lienholder any distributions being made by the limited liability company to the debtor-member as part of its distributions to all members.²

To aid in the collection of the distributions under the charging order, the court may appoint a receiver of the distributions and provide the receiver with the power to make any inquiries the debtor-member may have made.³ The court also has the power to make all other orders necessary to give effect to the charging order.⁴

If the judgment creditor makes a showing that the distributions under a charging order will not pay the judgment amount within a reasonable time, the court may foreclose the lien and order the sale of the debtor-member’s transferrable interest (the right to receive distributions from the LLC). In multi-member LLCs, the purchaser of the transferrable interest only obtains the debtor’s transferable interest – the purchaser does not become a member of the limited liability company.⁵ The purchaser would only obtain the right to receive distributions by the limited liability company in the future.

WULLCL Treatment of Sole-member LLCs

While the WULLCL does not significantly alter the historical scheme as it relates to multi-member LLC interests, it represents a fundamental change to the liability protections afforded to sole-member LLCs.

Now, if the debtor-member is a sole-member of a limited liability company, a court may order foreclosure of the charging order lien against the sole-member, confirm the sale, and allow the purchaser to obtain the sole-member’s entire interest in the limited liability company – not just the transferrable interest.⁶ This foreclosure effectively makes the purchaser the sole-member of the limited liability company, and the debtor-member no longer owns, or has any interest in, the limited liability company.

This is not only a drastic remedy against a sole-member limited liability company, but it is further complicated by Wisconsin’s marital property law. Generally, in Wisconsin, marital property can be used to satisfy the debt obligations of one of the spouses when incurred in the furtherance of the marriage.

In small family farm situations, many limited liability companies are sole-member or husband/wife entities (LLCs owned exclusively by a husband and wife who file a joint tax return are generally treated as a sole-member LLC).

Thus, when a limited liability company is owned by both spouses as marital property, a judgment creditor of either spouse (for debts taken on in furtherance of the marriage) may be able to obtain a charging order against one or both of the spouse’s LLC interest. In this situation, the creditor who is foreclosing a charging order may be able to convince a court to remove both spouses from the LLC by arguing that the LLC is effectively a single member LLC and there are no other members’ interests that need to be protected.

For attorneys representing small family farm LLCs, it is important to be aware of these changes and to discuss them with their sole-member LLC clients. While individual strategies to overcome these liability protections are outside the scope of this blog, there are likely opportunities to mitigate the effect of these changes. For example, it may now be a good time for sole-members to take on a very minority interest partner and update the LLC’s operating agreement with the appropriate creditor protections (e.g., buy/sell, restriction on voluntary/involuntary transfer prohibitions).

Apparent Authority

The WULLCL has eliminated the concept of “apparent authority” for LLCs.⁷ Apparent authority is the presumption that a member of the limited liability company has the authority to bind the company by reason of being a member.

Instead, the WULLCL now allows the limited liability company to file a Statement of Authority with WDFI. The Statement of Authority will allow the limited liability company to place limitations on the authority of the authorized person to bind the limited liability company. The Statement of Authority may remain effective for up to five years from filing.⁸

Many limited liability companies will find this Statement of Authority as a better option to having to provide full copies of their operating agreements to identify authorized parties who may bind the limited liability company.

Creditors and other parties contracting with the limited liability company will likely also find the use of the Statement of Authority as a simplified and more efficient tool for determining whether a party is authorized to bind the limited liability company.

Operating Agreement

An operating agreement is an agreement between an LLC and its member(s), which governs how the LLC and its member(s) interact with one another.⁹ The operating agreement is one of the most important documents pertaining to an LLC and every LLC should have one. The WULLCL both expands the definition of “operating agreement” as well as provides certain specific examples of what can and cannot be done with these documents.

Notably, the WULLCL has expanded the definition of an operating agreement to be any written, oral, or implied communication by or among the members.¹⁰ Written operating agreements are preferred. Verbal operating agreements are limited in what they can accomplish, while the WULLCL provides more latitude to written operating agreements.

Specifically, written operating agreements may do the following:

• alter, eliminate, or restrict certain aspects of the duty of loyalty;

• identify specific types or categories of activities that do not violate the duty of loyalty;

• alter the duty of care, provided it does not authorize any statutorily prohibited conduct; and/or

• alter or eliminate any other fiduciary duty.¹¹

Conversely, written operating agreements cannot do any of the following:

• eliminate or restrict remedies for the breach of the contractual obligations of good faith and fair dealing (but it can prescribe reasonable standards by which performance of such obligations are measured);¹²

• relieve or exonerate a member from liability for conduct that constitutes willful failure to deal fairly with the limited liability company or its members if such member has a material conflict of interest;¹³

• authorize the violation of a criminal law or willful misconduct;¹⁴ and/or

• allow the exoneration for transactions from which a member has derived an improper personal benefit.¹⁵

Members of a limited liability company should be sure that the operating agreement is in writing and reflects the intentions of all the members. Additionally, because the operating agreement can also be verbal and/or implied, the operating agreement should contain an integration clause to ensure that any amendment to the operating agreement is done in a writing signed by all the members of the limited liability company. Those LLCs that had an operating agreement in place prior to Jan. 1, 2023, should review their operating agreement to ensure that it does not violate any of the terms of the WULLCL.

Conclusion: A Major Change

The WULLCL is the first major change to Wisconsin’s LLC laws in almost 30 years. These changes will likely have a significant effect on how LLCs are structured and operated moving forward.

Attorneys should be aware of these changes and discuss them with their LLC clients, both to ensure compliance with the WULLCL, and to address potential risks created by these changes.

This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.

Endnotes

¹See2021 Wis. Act 258.

²See Wis. Stat. § 183.0503(1). Unless otherwise indicated, references to the Wisconsin statutes in the endnotes are to those affected by 2021 Wis. Act 258.

³See Wis. Stat. § 183.0503(2)(a).

⁴See Wis. Stat. § 183.0503(2)(b).

⁵See Wis. Stat. § 183.0503(3).

⁶See Wis. Stat. § 183.0503(6).

⁷See Wis. Stat. § 183.0301(1).

⁸See Wis. Stat. § 183.0302(1).

⁹See Wis. Stat. § 183.0105(1).

¹⁰See Wis. Stat. § 183.0102(13).

¹¹See Wis. Stat. § 183.0105(4)(c).

¹²See Wis. Stat. § 183.0105(3)(f).

¹³See Wis. Stat. § 183.0105(3)(g)(1).

¹⁴See Wis. Stat. § 183.0105(3)(g)(2) and (4).

¹⁵See Wis. Stat. § 183.0105(3)(g)(3).