Most business divorces do not start with fraud. They start with a gap.
Two people go into business. They agree on the important things — who does what, who gets paid, what happens if it works — in a truck or over a beer. Somebody downloads a form operating agreement, fills in the names, and files it away. Years later, when the money is real and the relationship is not, that document comes out of the drawer and does not say what either of them thought. Or it says nothing, which is worse, because then Minnesota law says it for them.
The statute that governs your LLC
Minnesota LLCs are governed by Minn. Stat. ch. 322C, the Minnesota Revised Uniform Limited Liability Company Act. No LLC could be formed under the prior chapter, 322B, on or after August 1, 2015, and “on and after January 1, 2018, this chapter governs all limited liability companies.” Minn. Stat. § 322C.1204, subds. 1(a), 2. Chapter 322B is largely repealed.
Older companies carry baggage. For an LLC formed before August 1, 2015, chapter 322C treats the language in its old articles, bylaws, or member control agreement as if it were in the operating agreement, and certain 322B-era rules carry forward — notably that profits, losses, voting power, and distributions track “the value of the contributions of the members” rather than the new act’s default. § 322C.1204, subd. 3(2), (3)(iii)–(vi). Two Minnesota LLCs can have opposite default rules depending on when they were formed.
The public filing tells the world almost nothing. Articles of organization must state only the company’s name, the registered office address and agent, and each organizer’s name and address. § 322C.0201, subd. 2. Ownership, management, money — none of it is public. It lives in the operating agreement, or nowhere.
You already have an operating agreement, whether or not you wrote one
Under Minnesota law an “operating agreement” is the agreement of all the members “whether oral, in a record, implied, or in any combination thereof.” § 322C.0102, subd. 17. No signed document is required. Your emails and your course of dealing can be — and in litigation regularly are — argued to be the operating agreement.
It governs relations among the members and with the company, the rights and duties of managers and governors, the conduct of the business, and how the agreement is amended. § 322C.0110, subd. 1. The company is bound by it even if the company never assented, and anyone who becomes a member “is deemed to assent” to it. § 322C.0111, subds. 1, 2. Then the sentence that decides most disputes: “To the extent the operating agreement does not otherwise provide for a matter described in subdivision 1, this chapter governs the matter.” § 322C.0110, subd. 2.
If you don’t write the rules, the statute writes them for you.
What the statute writes when you don’t
Management and voting. An LLC is member-managed unless the operating agreement expressly says it is “manager-managed” or “board-managed,” or uses words of similar import. § 322C.0407, subd. 1. In a member-managed company, “[e]ach member has equal rights in the management and conduct of the company’s activities” — equal, not proportional to ownership. Ordinary-course disagreements go to a majority of the members; anything outside the ordinary course, and any amendment, requires the consent of all members. § 322C.0407, subd. 2(2)–(5). The chapter also “does not entitle a member to remuneration for services performed for a member-managed limited liability company,” apart from winding up. § 322C.0407, subd. 7. The owner working sixty hours a week has no statutory right to a salary.
Distributions. Absent contrary agreement, distributions before dissolution “must be in equal shares among members and dissociated members.” § 322C.0404, subd. 1. Equal shares — not pro rata by capital. A member who put in $400,000 and one who put in nothing split the check down the middle. And no one has a right to a distribution unless the company decides to make one. § 322C.0404, subd. 2.
New members and transfers. After formation, a person becomes a member as the operating agreement provides, by a merger-type transaction, or “with the consent of all the members” — and may be admitted “without acquiring a transferable interest and without making or being obligated to make a contribution.” § 322C.0401, subds. 4, 5. A member may transfer a transferable interest, but the transferee gets only distributions: no management role, no records access. § 322C.0502, subds. 1, 2. A transfer restriction in the operating agreement is effective against a person with notice of it. § 322C.0502, subd. 6.
Getting out. Dissociation occurs on withdrawal, on an event the agreement specifies, on expulsion, on death, and in other listed circumstances. § 322C.0602. The sting: on dissociation the right to participate in management terminates, and the interest is thereafter owned “solely as a transferee.” § 322C.0603, subd. 1. There is no default buyout when you simply leave. (One narrow exception for LLCs formed before August 1, 2015: former §§ 322B.383 and 322B.386 survive under § 322C.1204, subd. 3(3)(vii)–(viii) and let a member demand fair value — but only in a merger, an asset sale, a conversion, an exchange, or certain charter amendments. Walking out the door is not on the list.) Walking away does not convert equity into money; it makes you a spectator holding a distribution right the company controls.
What an operating agreement cannot do
It may not eliminate the duty of loyalty, the duty of care, or any other fiduciary duty; eliminate the contractual obligation of good faith and fair dealing; unreasonably restrict the information rights in § 322C.0410; vary a court’s power to decree dissolution under § 322C.0701, subd. 1(4), (5); or unreasonably restrict a member’s right to sue under §§ 322C.0901 to 322C.0906. § 322C.0110, subd. 3.
What it can do, if not “manifestly unreasonable,” is narrow those duties with specificity: restrict or eliminate particular aspects of the duty of loyalty, identify categories of conduct that do not violate it, and alter the duty of care “except to authorize intentional misconduct or knowing violation of law.” § 322C.0110, subd. 4. It can limit liability for money damages, but not — among other carve-outs — for breach of loyalty, an improper financial benefit, intentional infliction of harm, or an intentional violation of criminal law. § 322C.0110, subd. 7.
The lesson: “no member owes any duty to anyone” is not enforceable. A clause letting a named member continue a specific identified competing business, subject to disclosure, generally is.
Fiduciary duties, and the trap in manager-managed companies
In a member-managed LLC, each member owes the company and the other members the duties of loyalty and care. § 322C.0409, subd. 1. Loyalty means accounting to the company for — and holding as trustee — any property, profit, or benefit derived from company activities, company property, or a company opportunity; not dealing with the company on behalf of an adverse interest; and not competing with the company before dissolution. § 322C.0409, subd. 2. Care means acting, subject to the business judgment rule, “with the care that a person in a like position would reasonably exercise under similar circumstances.” § 322C.0409, subd. 3.
Now the trap. In a manager-managed or board-managed LLC those duties attach to the managers or governors, and “[a] member does not have any fiduciary duty to the company or to any other member solely by reason of being a member.” § 322C.0409, subds. 7(5), 8(5). Choosing a management structure is not a formality; it reassigns who owes what to whom.
One safety valve worth building in: all members may authorize or ratify an otherwise disloyal act “after full disclosure of all material facts.” § 322C.0409, subd. 6. In writing, at the time.
Eight places these agreements fail
1. Equity granted without a documented contribution. A contribution can be money, property, services performed, a promissory note, or a contract for future services (§ 322C.0402), and a member can be admitted with no contribution at all. “He was going to earn it” is not self-executing.
2. Officer and manager authority left undefined. In a manager-managed company, “[e]xcept as otherwise expressly provided in this chapter, any matter relating to the activities of the company is decided exclusively by the managers.” § 322C.0407, subd. 3(1). Default duties for a CEO and a CFO exist only in the board-managed structure. § 322C.0407, subd. 4(14), (15). Calling someone “President” without defining the title creates an expectation, not a limit.
3. No spending or credit-card controls. Nothing in chapter 322C caps what an authorized person may spend. The duty to account as trustee is a remedy after the money is gone. § 322C.0409, subd. 2(1).
4. No books-and-records protocol. In a member-managed company, on reasonable notice a member may inspect and copy any record material to that member’s rights and duties, and the company must furnish material information without demand. § 322C.0410, subd. 1. In a manager- or board-managed company, the member makes a written demand describing the information and the purpose, and the company must respond in a record within ten days. § 322C.0410, subd. 2. Spell out a reporting cadence and the fight never happens.
5. No buy-sell and no valuation method. There is no default buyout on ordinary dissociation (§ 322C.0603; see the narrower pre-2015 exception under “Getting out,” above). “We’ll agree on a fair price when the time comes” is not a mechanism; it is a lawsuit with a deadline attached.
6. No deadlock breaker. Ordinary matters go to “a majority of the members,” and amendments require unanimity. § 322C.0407, subd. 2(2)–(5). In a two-member company there is no majority. Without a contractual tiebreaker, the exit ramp is a court application on the ground that “it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization and the operating agreement.” § 322C.0701, subd. 1(4)(ii).
7. Silence on competing outside businesses. The default duty of loyalty bars competing with the company before dissolution. § 322C.0409, subd. 2(3). Owners often arrive with other ventures and assume everyone knows. The agreement can carve out identified activities (§ 322C.0110, subd. 4(1)(iii), (2)); silence leaves a breach claim on the table.
8. Never updated. Amendment requires unanimous member consent by default. § 322C.0407, subds. 2(5), 3(4)(iv). Once the relationship sours you will not get unanimity. Amend while everyone still agrees.
If you are the minority owner
On a member’s application, a court may dissolve the company if those in control “have acted, are acting, or will act in a manner that is illegal or fraudulent,” or “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” § 322C.0701, subd. 1(5). The court may instead order another remedy — including “the sale for fair value of all membership interests a member owns” to the company or the other members. § 322C.0701, subd. 2. In practice, that buyout is the relief that matters.
“Oppressive” is defined by statute and turns on reasonable expectations: conduct unfairly prejudicial to the member because it frustrated an expectation that was reasonable in light of the other members’ reasonable expectations, was material to the decision to become or remain a member, was known or should have been known to the others, and “is not contrary to the operating agreement as applied consistently with the contractual obligation of good faith and fair dealing.” § 322C.0102, subd. 18(a)(3). A good-faith disagreement about what the agreement means is not, by itself, oppression. § 322C.0102, subd. 18(b)(2).
Read that fourth element again. The operating agreement is the baseline against which a minority owner’s expectations get measured. It can protect you, or it can be the reason your expectation was unreasonable. What it cannot do is strip the court’s power to grant that relief. § 322C.0110, subd. 3(7).
Practical tips
- Put it in writing before the money moves. The leverage to negotiate exists only before the first dollar and the first customer.
- Document every capital contribution — amount, date, form, agreed value — on a schedule attached to the agreement. Vest equity granted for future work, with a repurchase right and a formula price on early departure.
- Set spending authority by number: any single expenditure over $X requires written approval of a second authorized person. Name the authorized signers on each account.
- Define titles as authority, not honorifics. List what the CEO may sign, hire, and commit, and what requires member consent. Require written consent for related-party transactions, with disclosure of all material facts before the vote. § 322C.0409, subd. 6.
- Build a valuation formula, not a promise to agree later — method, payment terms, deadline — plus a deadlock mechanic: mediation then binding arbitration, a buy-sell or shotgun provision, or a neutral tiebreaker.
- Review the agreement annually. A Minnesota LLC “must file with the secretary of state by December 31 of each calendar year a renewal containing the items required by section 5.34,” and failing to file leads to administrative termination. § 322C.0208(a), (b). Use that deadline as the trigger.
- Keep company and personal finances strictly separate. Chapter 322C says failure to observe formalities “relating exclusively to the management of its internal affairs” is not a ground for personal liability, but Minnesota’s corporate veil-piercing case law otherwise applies to LLCs. § 322C.0304, subds. 2, 3. Commingling is not an internal formality.
- Write it for the reader who matters. Years from now a judge, an arbitrator, or a jury will read this document cold, without you in the room to explain it. If a sentence needs your testimony to make sense, rewrite the sentence.
An operating agreement is not paperwork. It is the only place your actual deal exists.
This article is general information from Madgett Law, LLC, a Minnesota law firm. It is not legal advice, does not address any specific person’s or company’s circumstances, and does not create an attorney-client relationship. Business-entity law is fact-specific and changes over time; outcomes depend on the particular facts and the governing law, and no result is guaranteed.
If you are forming a Minnesota LLC, reviewing an existing operating agreement, or dealing with a dispute among owners, use the Message Us feature on this site to contact the firm.