Your Minnesota Operating Agreement Will Be Judged on the Day You Signed It — Not on How the Deal Turned Out

Minnesota’s LLC act does something that looks contradictory. Section 322C.0110, subd. 3(4) says an operating agreement “may not . . . eliminate the duty of loyalty, the duty of care, or any other fiduciary duty.” Four paragraphs later, subdivision 4 tells you exactly how to eliminate them.

That apparent contradiction gets a lot of attention. It is not the interesting part.

The interesting part is subdivision 8, which almost nobody quotes, and which answers the questions that actually decide a member dispute: who decides whether a duty term is enforceable, when the term is measured, what evidence the court may look at, and how strong the challenge has to be. The answers are, in order: the court; the day the term became part of the agreement; only the circumstances existing on that day; and a standard that requires the defect to be “readily apparent.”

Put those together and a rule falls out that changes how these agreements should be drafted: the enforceability of a Minnesota LLC duty term is fixed at signing, on the record that existed at signing. Not on how it was used. Not on what it produced. Not on how badly it turned out for the minority.

The two lists

Subdivision 3 is the fence. An operating agreement may not, among other things:

(4) subject to subdivisions 4 to 7, eliminate the duty of loyalty, the duty of care, or any other fiduciary duty;

(5) subject to subdivisions 4 to 7, eliminate the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4;

(6) unreasonably restrict the duties and rights stated in section 322C.0410;

…

(9) unreasonably restrict the right of a member to maintain an action under sections 322C.0901 to 322C.0906;

Clauses (4) and (5) come pre-qualified: “subject to subdivisions 4 to 7.” The prohibition is announced and immediately made conditional.

Subdivision 4 is the gate. Its opening words are the ones to memorize:

If not manifestly unreasonable, and without limiting the terms that may be included in an operating agreement, the operating agreement may:

(1) restrict or eliminate the duty:

(i) as required in section 322C.0409, subdivisions 2, clause (1), 7, and 8, to account to the limited liability company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company’s business, from a use by the member of the company’s property, or from the appropriation of a limited liability company opportunity;

(ii) as required in section 322C.0409, subdivisions 2, clause (2), 7, and 8, to refrain from dealing with the company in the conduct or winding up of the company’s business as or on behalf of a party having an interest adverse to the company; and

(iii) as required by section 322C.0409, subdivisions 2, clause (3), 7, and 8, to refrain from competing with the company in the conduct of the company’s business before the dissolution of the company;

(2) identify specific types or categories of activities that do not violate the duty of loyalty;

(3) alter the duty of care, except to authorize intentional misconduct or knowing violation of law;

(4) alter any other fiduciary duty, including eliminating particular aspects of that duty; and

(5) prescribe the standards by which to measure the performance of the contractual obligation of good faith and fair dealing under section 322C.0409, subdivision 4.

Each of the three components of the duty of loyalty can be restricted or eliminated outright. The duty of care can be altered — with one hard floor: not “to authorize intentional misconduct or knowing violation of law.” Even good faith and fair dealing can have its measuring standards prescribed by the agreement.

So the freedom is real and it is broad. Everything then turns on four words: “if not manifestly unreasonable.”

Subdivision 8: when the term is judged, and by whom

The court shall decide any claim under subdivision 4 that a term of an operating agreement is manifestly unreasonable. The court:

(1) shall make its determination as of the time the challenged term became part of the operating agreement and by considering only circumstances existing at that time; and

(2) may invalidate the term only if, in light of the purposes and activities of the limited liability company, it is readily apparent that:

(i) the objective of the term is unreasonable; or

(ii) the term is an unreasonable means to achieve the provision’s objective.

Four holdings in eighty words.

1. “The court shall decide.” Whether a duty term is manifestly unreasonable is not a fact question for a jury. It is assigned to the court by statute.

2. Judged as of the time the term became part of the agreement. Not as of the breach. Not as of the lawsuit. The relevant moment is the moment the clause entered the document — which, for an amended agreement, may be years after formation and may differ clause by clause.

3. “By considering only circumstances existing at that time.” This is the sentence with teeth. The evidence that the majority member used a competition carve-out to take the company’s best customer is not evidence that the carve-out was manifestly unreasonable when written. The statute forecloses the argument from consequences.

4. “Readily apparent.” The court may invalidate “only if . . . it is readily apparent” that the objective is unreasonable or that the term is an unreasonable means to that objective. A term that is merely one-sided, or merely bad for the person challenging it, does not meet that description on the face of the statute.

Notice also the test’s structure: objective, then means. Subdivision 8(2) asks two separate questions — is the objective of the term unreasonable, and is the term an unreasonable means of achieving that objective — and both are measured “in light of the purposes and activities of the limited liability company.” A clause therefore lives or dies partly on whether the agreement itself says what the company is for and why the clause exists.

That is a drafting instruction hiding in an adjudication provision. The recitals are the evidence. A competition carve-out that appears without explanation in an agreement signed in 2019 has to be defended in 2026 out of whatever circumstances existed in 2019 — and if the agreement says nothing about why the carve-out is there, the defense is being built from memory and deposition testimony rather than from the document.

One limit, stated honestly: subdivision 8 by its terms governs “any claim under subdivision 4.” A challenge grounded elsewhere — subdivision 6, subdivision 7, or the “unreasonably restrict” clauses in subdivision 3 — is not obviously subject to the same timing and burden rules. The statute does not say, and this page does not resolve it.

The asymmetry: you may shrink the duty; you may not exculpate the breach

Now put subdivision 4 next to subdivision 7, which governs exculpation:

The operating agreement may alter or eliminate the indemnification for a member, manager, or governor provided by section 322C.0408, subdivision 2, and may eliminate or limit a member’s, manager’s, or governor’s liability to the limited liability company and members for money damages, except for:

(1) breach of the duty of loyalty;

(2) a financial benefit received by the member or manager to which the member or manager is not entitled;

(3) a breach of a duty under section 322C.0406;

(4) intentional infliction of harm on the company or a member; or

(5) an intentional violation of criminal law.

Read the two together:

The practical consequence is the single most useful drafting rule in chapter 322C: all of the work has to be done on the front end.

You can define the duty of loyalty down — carve out a member’s other ventures, identify categories of activity that do not violate loyalty, permit named related-party transactions. What you cannot do is leave the duty broad and then write a clause saying nobody pays damages for breaching it. Subdivision 7(1) forecloses that. So an operating agreement that tries to protect a member with a sweeping exculpation clause instead of a precise duty definition has protected nobody.

There is a middle path the statute expressly supplies and that most agreements omit. Subdivision 5:

The operating agreement may specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts.

And § 322C.0409, subd. 6 supplies the statutory default version: “All of the members of a member-managed limited liability company or a manager-managed limited liability company may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”

A process for approving conflicted transactions — disinterested approvers, full disclosure, in writing, before the fact — reaches the same commercial result as a duty carve-out without asking a court to bless a blanket waiver years later. The related theme of what Minnesota permits you to contract away, and what it holds back, runs through more than the LLC act; see Minnesota Will Let You Contract Away Almost Anything.

What the duty of loyalty is, and the defense the statute writes for you

Section 322C.0409, subd. 1 sets the frame:

A member of a member-managed limited liability company owes to the company and, subject to section 322C.0901, subdivision 2, the other members the fiduciary duties of loyalty and care stated in subdivisions 2 and 3.

That cross-reference is load-bearing. Section 322C.0901, subd. 2 provides: “A member maintaining a direct action under this section must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company.” A duty is owed to the other members, but suing on it directly requires pleading and proving an injury distinct from the company’s.

The duty of loyalty itself, subdivision 2, has three components: to account to the company and hold as trustee any property, profit, or benefit derived “in the conduct or winding up of the company’s activities,” “from a use by the member of the company’s property,” or “from the appropriation of a limited liability company opportunity”; to refrain from dealing with the company “as or on behalf of a person having an interest adverse to the company”; and to refrain from competing with the company “before the dissolution of the company.”

The duty of care, subdivision 3, is “[s]ubject to the business judgment rule . . . to act with the care that a person in a like position would reasonably exercise under similar circumstances and in a manner the member reasonably believes to be in the best interests of the company,” with an express good-faith reliance provision.

And then subdivision 5, which is a gift to defense counsel and is almost never pleaded:

It is a defense to a claim under subdivision 2, clause (2), and any comparable claim in equity or at common law that the transaction was fair to the limited liability company.

That is a statutory fairness defense to self-dealing — and note its reach. It applies not only to the statutory claim but to “any comparable claim in equity or at common law.” A plaintiff who repleads a self-dealing claim as common-law breach of fiduciary duty does not escape it.

Finally, subdivision 4 states the obligation that cannot be drafted away entirely: “A member in a limited liability company shall discharge the member’s duties and exercise any rights under this chapter or under the operating agreement consistently with the contractual obligation of good faith and fair dealing, including acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.” The agreement may prescribe the standards by which its performance is measured (§ 322C.0110, subd. 4(5)); it may not eliminate it (subd. 3(5)).

Whether anyone owes you anything at all depends on a box checked at formation

Section 322C.0409 states the duties for a member-managed company. Subdivisions 7 and 8 then reassign them. In a manager-managed company: “Subdivisions 1, 2, 3, and 5 apply to the manager or managers and not the members,” and — the sentence that ends most member-versus-member cases before they start —

(5) A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member.

Subdivision 8 says the same for a board-managed company, substituting governors for managers.

So the management structure chosen at formation determines whether your co-owner owes you a fiduciary duty at all. In a great many Minnesota LLCs that choice was made in an afternoon, from a template, by people who understood it as an administrative question about who signs contracts.

Two things survive that reassignment in every structure. The good-faith-and-fair-dealing obligation in subdivision 4 “applies to the members and managers” (subds. 7(3), 8(3)). And the information rights in § 322C.0410 remain, though they change shape: in a manager-managed or board-managed company a member must demand information “in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information,” and the company has ten days to respond in a record identifying what it will provide or “if the company declines to provide any demanded information, the company’s reasons for declining.” § 322C.0410, subd. 2(2)–(3).

Note who bears the burden if the company restricts access: “In a dispute concerning the reasonableness of a restriction under this subdivision, the company has the burden of proving reasonableness.” § 322C.0410, subd. 7. That allocation is more favorable to the requesting owner than most people expect — though it remains a materially weaker right than a Minnesota corporate shareholder’s, which is absolute, on ten days, with no purpose to prove.

If your LLC was formed before August 2015, your old documents are your operating agreement

This is the piece that surprises people who assume chapter 322C is only for newer companies.

Section 322C.1204, subd. 2: “Except as otherwise provided in subdivision 3, on and after January 1, 2018, this chapter governs all limited liability companies.”

And subdivision 3(2) provides that, for a company formed before August 1, 2015, and quoting the clause in full including its two prefatory qualifiers:

for the purposes of applying section 322C.0102, subdivision 17, and subject to section 322C.0112, subdivision 4, the language in the articles of organization, and any bylaws, operating agreement, or member control agreement of a limited liability company formed before August 1, 2015, that becomes subject to this chapter will operate as if that language were in the operating agreement of the limited liability company when it becomes subject to this chapter

Those two qualifiers matter enough to keep on the page: the clause operates for purposes of the chapter’s definition of “operating agreement” at § 322C.0102, subd. 17, and it is subject to § 322C.0112, subd. 4. Neither disturbs the point below, but a reader relying on this provision should go read both.

Read that as a practitioner. A member control agreement drafted in 2008 under chapter 322B is now operating as an operating agreement under chapter 322C — and its duty provisions, drafted against a different statutory scheme, are now measured against § 322C.0110’s fence and, under subdivision 8, “as of the time the challenged term became part of the operating agreement.”

Chapter 322B did not use the same vocabulary. Terms written to allocate authority under the old act now function as duty terms under the new one, and some of them do work nobody intended. Any Minnesota LLC still operating on pre-2015 papers has a governance document it has never read against the statute that now governs it.

What to do

If you are drafting or amending:

1. Do the work in the duty definition, not in an exculpation clause. Subdivision 7(1) will not save a member from money damages for breaching the duty of loyalty, however broadly the exculpation is written.
2. Write recitals that state the objective. Subdivision 8(2) tests the objective of the term and whether the term is a reasonable means to it, “in light of the purposes and activities of the limited liability company.” Put the purpose in the document.
3. Date and paper every amendment. The measuring moment is when the challenged term “became part of the operating agreement,” and only circumstances existing then may be considered. A clean record of what was known and negotiated on that date is the defense.
4. Use the ratification machinery in subdivision 5 and § 322C.0409, subd. 6: disinterested and independent approvers, full disclosure of all material facts, in writing, in advance.
5. Choose the management structure deliberately. Manager-managed and board-managed companies relieve members of fiduciary duty “solely by reason of being a member.” If the owners intend to owe each other something, say so.
6. Never draft to authorize intentional misconduct or a knowing violation of law. Subdivision 4(3) forbids it outright, and subdivision 7(4) and (5) close the damages route as well.

If you are a minority member in a dispute:

7. Read the agreement against the statute before you read it against your grievance. The question is what duty existed on paper, not what feels unfair now.
8. Find out when the offending clause entered the document and what the circumstances were on that day. Under subdivision 8 that is the only evidentiary window for a manifest-unreasonableness challenge.
9. Check whether your claim is direct or derivative. Section 322C.0901, subd. 2 requires pleading and proving an injury “not solely the result of an injury suffered or threatened to be suffered by the limited liability company.”
10. Use the information rights first. A demand under § 322C.0410 gets a ten-day answer and puts the burden of justifying any restriction on the company.

The statutory remedies available to a frozen-out member — including a court-ordered buyout at fair value — are covered in Your LLC Partner Is Freezing You Out, and the exit terms that prevent the fight in the first place are covered in Buy-Sell Agreements in Minnesota Closely Held Businesses.

The observation

Minnesota’s LLC act is usually described as contractarian: the parties write their own duties and the statute fills gaps. That description is right about subdivisions 1 through 7 and misses the thing that decides cases.

The fence around private ordering in chapter 322C is not really a list of forbidden clauses. It is an evidentiary rule. Subdivision 8 says the court decides, at a fixed moment, on a closed record, under a standard that requires the defect to be readily apparent. That converts the enforceability of a duty term from a question about fairness — which is naturally argued from consequences — into a question about the day the clause was written.

Business litigators tend to build member-dispute cases out of what happened. In Minnesota, on a challenge to a duty term, most of what happened is inadmissible to the question.

The lesson for anyone forming or amending a Minnesota LLC is not that duty terms are unassailable. It is that the case for and against them is created at signing and cannot be improved later. The half hour spent writing down why a clause exists, on the day it is agreed to, is the entire defense of that clause five years on — and the party who skipped that half hour will be arguing from a record that the statute does not permit the court to look at.

Madgett Law, LLC advises Minnesota LLC members and managers on operating agreements, fiduciary duty disputes, and owner exits. If you are drafting an agreement, amending one, or on the wrong end of one, send us a message or call 612-470-6529.

Sources: Minn. Stat. § 322C.0110 (operating agreement; scope, function, and limitations) — subd. 1 (matters the operating agreement governs); subd. 2 (chapter governs matters the agreement does not address); subd. 3 (the eleven restrictions, including clause (4) on fiduciary duties and clause (5) on good faith and fair dealing, both “subject to subdivisions 4 to 7”; clause (6) on § 322C.0410 rights; and clause (9) on actions under §§ 322C.0901 to 322C.0906); subd. 4 (provisions particularly but not exclusively authorized “[i]f not manifestly unreasonable,” including restriction or elimination of the three loyalty duties, alteration of the duty of care “except to authorize intentional misconduct or knowing violation of law,” alteration of any other fiduciary duty, and prescription of standards for good faith and fair dealing); subd. 5 (authorization or ratification by disinterested and independent persons after full disclosure of all material facts); subd. 6 (elimination of fiduciary duty where responsibility is eliminated and imposed on others); subd. 7 (indemnification and exculpation, with the five exceptions including breach of the duty of loyalty); subd. 8 (determining whether a term is manifestly unreasonable — court decides; determination made as of the time the term became part of the agreement and considering only circumstances existing at that time; invalidation only if “readily apparent” that the objective is unreasonable or the term an unreasonable means to it). Minn. Stat. § 322C.0409 (standards of conduct for members, managers, and governors) — subd. 1 (scope of duties, subject to § 322C.0901, subd. 2); subd. 2 (three components of the duty of loyalty); subd. 3 (duty of care, subject to the business judgment rule, with good-faith reliance); subd. 4 (contractual obligation of good faith and fair dealing); subd. 5 (fairness defense to a claim under subd. 2, clause (2), “and any comparable claim in equity or at common law”); subd. 6 (authorization and ratification after full disclosure); subd. 7 (manager-managed company rules, including clause (5): “A member does not have any fiduciary duty to the company or to any other member solely by reason of being a member”); subd. 8 (board-managed company rules, same). Minn. Stat. § 322C.0410 (information rights) — subd. 2(2)–(3) (demand in a record with reasonable particularity and purpose; ten-day response in a record, including reasons for declining); subd. 7 (reasonable restrictions; the company bears the burden of proving reasonableness). Minn. Stat. § 322C.0901 (direct action by member) — subd. 2 (pleading and proof of an injury not solely the result of injury to the company). Minn. Stat. § 322C.1204 (application to existing relationships) — subd. 1 (no LLC may be formed under chapter 322B on or after August 1, 2015); subd. 2 (chapter 322C governs all limited liability companies on and after January 1, 2018); subd. 3(2) (for the purposes of applying § 322C.0102, subd. 17, and subject to § 322C.0112, subd. 4, language in the articles of organization, bylaws, operating agreement, or member control agreement of a pre-August 1, 2015 company operates as if it were in the operating agreement). All from the Minnesota Office of the Revisor of Statutes, 2025 Minnesota Statutes. Currency check: the Revisor’s Table 2 shows the most recent entries for §§ 322C.0110, 322C.0409, 322C.0410, 322C.0901, and 322C.1204 as the 2014 and 2015 Regular Sessions (2014 c 157; 2015 c 39), with no 2025 or 2026 session entries for any of them.

This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Whether a particular operating agreement term is enforceable, and what duties any particular member or manager owes, depends on the document, the company’s structure, and the circumstances at the time the term was adopted. No outcome is promised or implied.