A manager of a Minnesota LLC is sued. She did nothing wrong, and she will probably be able to prove it — in about two years, for something in the low six figures.
Whether she can afford to fight at all turns on a distinction that most operating agreements blur into a single paragraph. Indemnification is a promise to make her whole after the case ends. Advancement is a promise to pay her lawyer while it is running. The first is worth a great deal at the end and nothing at the beginning. The second is the only one of the two that decides whether there is a defense.
Minnesota’s answer is not what most people expect from reading a form operating agreement. Chapter 322C makes both of them mandatory — “shall indemnify,” “is entitled” — and then, in the next subdivision, lets the operating agreement prohibit both outright.
One housekeeping note before the analysis. Section 322C.0408 is captioned “INDEMNIFICATION AND INSURANCE.” Advancement lives inside it, at subdivision 3, under the heading “Advances.” It is easy to miss if you are skimming section titles.
What is the difference, exactly?
Indemnification under § 322C.0408, subd. 2(a) reaches “judgments, penalties, fines, including, without limitation, excise taxes assessed against the person with respect to an employee benefit plan, settlements, and reasonable expenses, including attorney fees and disbursements, incurred by the person in connection with the proceeding.” It is backward-looking: the criteria are applied to conduct that has already been adjudicated or resolved.
Advancement under subdivision 3 reaches only “reasonable expenses, including attorney fees and disbursements … in advance of the final disposition of the proceeding.” Not judgments. Not fines. Not settlements. Defense costs, while the case is alive.
That is the whole trade. A manager with indemnification and no advancement must finance her own defense and hope to be reimbursed. A manager with advancement has counsel from day one and owes the money back only if she loses on the criteria.
What does chapter 322C give you if the operating agreement says nothing?
Both — and the verbs are mandatory.
Minn. Stat. § 322C.0408, subd. 2(a):
Subject to the provisions of subdivision 4, a limited liability company shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person …
if, with respect to the acts or omissions complained of, the person: (1) “has not been indemnified by another organization or employee benefit plan for the same” amounts; (2) “acted in good faith”; (3) “received no improper personal benefit and complied with the duties stated in sections 322C.0405 and 322C.0409, if applicable”; (4) “in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful”; and (5) reasonably believed the conduct was in the best interests of the company for acts in the capacities described in subd. 1(c)(1) or (2), or not opposed to the best interests of the company for service at the company’s request to another organization under subd. 1(c)(3).
Three features of that structure matter in practice.
“Threatened to be made a party” counts. So does the definition of “proceeding”: “a threatened, pending, or completed civil, criminal, administrative, arbitration, or investigative proceeding, including a proceeding by or in the right of the limited liability company.” § 322C.0408, subd. 1(d). Investigations count, arbitrations count, and so do derivative proceedings.
A bad ending does not by itself defeat the claim. “The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.” Subd. 2(b). The criteria are about the underlying conduct, not the outcome.
Condition (3) is where indemnification actually dies. A person held liable for an improper distribution — which requires, by definition, both a violation of § 322C.0405 and a failure to comply with § 322C.0409 in consenting — is outside the indemnification obligation. We walk through that liability in improper LLC distributions and who pays them back. The same condition means a loyalty breach or an improper personal benefit is not indemnifiable, which is the same list the fiduciary-duty provisions protect.
Advancement: an entitlement, with a price
Section 322C.0408, subd. 3:
Subject to the provisions of subdivision 4, if a person is made or threatened to be made a party to a proceeding, the person is entitled, upon written request to the limited liability company, to payment or reimbursement by the limited liability company of reasonable expenses, including attorney fees and disbursements, incurred by the person in advance of the final disposition of the proceeding:
(1) upon receipt by the limited liability company of a written affirmation by the person of a good faith belief that the criteria for indemnification in subdivision 2 have been satisfied and a written undertaking by the person to repay all amounts so paid or reimbursed by the limited liability company, if it is ultimately determined that the criteria for indemnification have not been satisfied; and
(2) after a determination that the facts then known to those making the determination would not preclude indemnification under this section.
Four practical points.
It is an entitlement, not a favor. “[I]s entitled, upon written request.” The company does not get to decide whether advancement is a good idea; it gets to decide whether the two statutory conditions are met.
You must ask in writing, and you must sign two documents — an affirmation of good-faith belief that the indemnification criteria are satisfied, and an undertaking to repay if they are not. Neither is optional, and an oral request does not start the clock.
The undertaking is real and unsecured. It “is an unlimited general obligation of the person making it, but need not be secured and shall be accepted without reference to financial ability to make the repayment.” That last clause is what makes advancement work: a company cannot refuse on the ground that the manager could never repay. The flip side is a personal, uncapped obligation if the criteria are ultimately not met.
The gate in clause (2) is deliberately low. The determination is whether “the facts then known to those making the determination would not preclude indemnification.” That is a screening question, phrased in the negative on purpose — not a finding that the person will win.
Who decides — and the 60-day clock that gets you into court
This is the machinery nobody reads until they need it. Section 322C.0408, subd. 6(a) provides that all determinations — both whether indemnification is required and whether advancement is owed — must be made:
- In a board-managed company, by a majority of a quorum of the board excluding governors who are parties; if that quorum cannot be obtained, by a committee of two or more non-party governors designated by a majority of the full board including parties; and if neither works, by special legal counsel. Subd. 6(a)(1).
- In all other cases — member-managed and manager-managed companies — “by the affirmative vote of the members, subject to section 322C.1204, subdivision 3, with each member having voting power in proportion to the member’s interest in distributions of the limited liability company prior to dissolution,” and the interests held by parties to the proceeding “must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination.” Subd. 6(a)(2).
Note the definition that goes with the board-managed route. “Special legal counsel” means counsel who has not in the preceding five years represented the company or a related organization in any other capacity, or represented the person whose indemnification is at issue. § 322C.0408, subd. 1(e). Your regular outside counsel is disqualified.
And note the problem the member vote creates in a small company. If the person seeking indemnification is a member and a party, that member’s interest is excluded — so in a two-member LLC, the other member decides alone. In a company with a live dispute between the owners, that is not a neutral tribunal.
Which is what subdivision 6(a)(3) is for. If an adverse determination is made, or if no determination is made within 60 days — for indemnification, 60 days after the later of the termination of the proceeding or a written request to the company; for advancement, 60 days after a written request for an advance — a court in this state may decide, and it “may be the same court in which the proceeding involving the person’s liability took place.” The sting: “The person seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled” to it.
For advancement that produces a fast path. Written request with affirmation and undertaking; sixty days of silence or a refusal; application to a court. Send the request the week you are served, not the month you run out of money — the clock does not start until the writing lands.
The operating agreement can delete all of it
Here is the part that upends the reading of subdivision 2’s “shall.”
Section 322C.0408, subd. 4:
The articles of organization or the operating agreement either may prohibit indemnification or advances of expenses otherwise required by this section or may impose conditions on indemnification or advances of expenses in addition to the conditions contained in subdivisions 2 and 3 including, without limitation, monetary limits on indemnification or advances of expenses, if the conditions apply equally to all persons or to all persons within a given class.
So chapter 322C’s indemnification and advancement provisions are defaults, not floors. They apply because § 322C.0110, subd. 2 supplies the chapter’s rules where the operating agreement does not provide otherwise. A single sentence in the operating agreement removes them.
Two limits on that power are worth knowing.
Conditions must apply equally. A provision that indemnifies the managing member and nobody else fails the “apply equally to all persons or to all persons within a given class” requirement — unless the drafting genuinely creates a class.
A prohibition or limit is not retroactive. “A prohibition or limit on indemnification or advances may not apply to or affect the right of a person to indemnification or advances of expenses with respect to any acts or omissions of the person occurring before the effective date of a provision in the articles of organization, a member control agreement, or the date of adoption of a provision in the bylaws establishing the prohibition or limit on indemnification or advances.” Subd. 4. You cannot amend away a right to defense costs for conduct that already happened.
A drafting warning follows from all of this. Because the Minnesota default is mandatory, a form operating agreement that says “the Company may indemnify its managers to the fullest extent permitted by law” is not the neutral position it looks like. It is a candidate for being read as imposing a condition on — or eliminating — a right the statute otherwise makes mandatory. If the intent is to keep the statutory scheme, say so: recite that the company shall indemnify and advance to the full extent provided by § 322C.0408 and that nothing in the agreement is intended to prohibit or condition those rights. See Minnesota LLC operating agreements and how they fail for the broader pattern.
Where the actual floor is: exculpation and insurance
Indemnification is waivable. Two neighboring doctrines are not, and they work differently.
Exculpation has a hard floor. Section 322C.0110, subd. 7 provides that 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 grammar. The five exceptions attach to the liability-limitation clause. The indemnification clause is unqualified — the operating agreement may “alter or eliminate” it, full stop — and § 322C.0408, subd. 4 independently confirms that by authorizing an outright prohibition of “indemnification or advances of expenses otherwise required by this section.” Note also that § 322C.0110, subd. 7 mentions only § 322C.0408, subdivision 2; the authority to alter advancement comes from § 322C.0408, subd. 4, which covers both. The two provisions are not perfectly aligned, and subdivision 4 is the operative one for advancement.
The upshot: you can contract away who pays for the defense. You cannot contract away liability for disloyalty, an improper financial benefit, an improper distribution, intentional harm, or intentional crime. That pattern — freedom about money, limits about accountability — runs through the whole chapter, and we traced it across Minnesota law in what you cannot agree to.
Insurance reaches past both. Section 322C.0408, subd. 7 is the most useful sentence in the section for anyone whose operating agreement is unhelpful:
A limited liability company may purchase and maintain insurance on behalf of a member, manager, or governor of the company against liability asserted against or incurred by the member, manager, or governor in that capacity or arising from that status even if, under section 322C.0110, subdivision 7, the operating agreement could not eliminate or limit the person’s liability to the company for the conduct giving rise to the liability and whether or not the limited liability company would have been required to indemnify the person against the liability under this section.
Insurance is expressly permitted where exculpation is forbidden and where indemnification is not required. It is the only one of the three that is not defeated by the operating agreement, because it is not a promise from the company — it is a policy from a carrier, subject to its own terms and exclusions.
The four layers, side by side
| What it does | When it pays | Can the operating agreement eliminate it? | |
|---|---|---|---|
| Exculpation — § 322C.0110, subd. 7 | Limits the person’s liability to the company and members for money damages | Never pays; prevents the liability | Yes, except for the five carve-outs (loyalty, improper financial benefit, § 322C.0406 breach, intentional harm, intentional crime) |
| Indemnification — § 322C.0408, subd. 2 | Company pays judgments, penalties, fines, settlements, and reasonable expenses | After the proceeding, on the subd. 2 criteria | Yes — prohibited or conditioned under subd. 4, but not retroactively |
| Advancement — § 322C.0408, subd. 3 | Company pays reasonable expenses and attorney fees | During the proceeding, on written request, affirmation, and undertaking | Yes — same subd. 4 authority, same non-retroactivity limit |
| Insurance — § 322C.0408, subd. 7 | Carrier pays under the policy | Per the policy | Not by the operating agreement — expressly available even where exculpation is barred and indemnification is not required |
Two more provisions catch companies off guard. If the company indemnifies or advances expenses “in connection with a proceeding by or on behalf of the limited liability company,” it “shall report to the members in writing the amount of the indemnification or advance and to whom and on whose behalf it was paid not later than the next meeting of members.” § 322C.0408, subd. 8. Advancing a manager’s defense costs in a derivative case is a disclosable event. And subdivision 9 preserves the power to indemnify people the section does not cover — “persons other than a governor, manager, member, employee, or member of a committee of the board” — “by contract or otherwise.”
What to do
If you are drafting the operating agreement:
- Address advancement separately and by name. A paragraph that says only “indemnification” leaves the most valuable right in the statute to inference.
- Do not use permissive language if you mean the statutory default. In Minnesota, “may indemnify” is a downgrade from “shall.”
- If you do limit it, apply the limit to a class. Subdivision 4 requires that conditions “apply equally to all persons or to all persons within a given class.”
- Name the decision-maker in advance. Subdivision 6 hands the question to the members, weighted by distribution interest, in every company that is not board-managed — a guaranteed fight in a two-owner company. Consider designating special legal counsel or an independent process in the agreement itself.
- Buy the insurance. Subdivision 7 is the layer that survives everything else.
If you have just been named in a proceeding:
- Send the written request immediately, with the affirmation and the undertaking, and keep proof of when it was received. The 60-day clock runs from the written request.
- Read the operating agreement before you rely on the statute. Subdivision 4 means the default may not be your rule.
- Understand what you signed. The undertaking is an unlimited, unsecured personal obligation to repay. It is the right trade in most cases; it is not free.
- Tender to the carrier the same week. A policy purchased under subdivision 7 has its own notice conditions that nothing in chapter 322C relaxes.
The version of this that goes badly is not the one where indemnification is denied at the end. It is the one where a manager with a good defense cannot fund it for the eighteen months it takes to prove she was right, settles, and then discovers that the settlement she paid for herself is exactly what the statute would have covered.
Madgett Law, LLC advises Minnesota LLC managers, governors, and members on indemnification and advancement — making and answering demands, using the 60-day route in § 322C.0408, subd. 6, and drafting the operating agreement provisions that decide the question before anyone is sued. If you have just been named in a proceeding involving a company you help run, the written request is the first thing to send. Send us a message or call 612-470-6529.
Sources: Minn. Stat. § 322C.0408 (indemnification and insurance — subd. 1(c), “official capacity”; subd. 1(d), “proceeding,” including threatened, arbitration, investigative, and proceedings by or in the right of the company; subd. 1(e), “special legal counsel” and the five-year disqualification; subd. 2(a), the mandatory indemnification obligation and its five criteria, including good faith, no improper personal benefit and compliance with §§ 322C.0405 and 322C.0409, the criminal-proceeding condition, and the best-interests conditions keyed to subd. 1(c); subd. 2(b), termination of a proceeding does not of itself establish failure to meet the criteria; subd. 3, entitlement to advances of reasonable expenses upon written request, written affirmation, and written undertaking, the determination that then-known facts would not preclude indemnification, and the unlimited, unsecured character of the undertaking; subd. 4, authority of the articles of organization or operating agreement to prohibit or condition indemnification or advances, the equal-application requirement, and the bar on retroactive application; subd. 5, witness reimbursement; subd. 6(a)(1)–(3), who makes the determinations in board-managed and other companies, the exclusion of party interests, and the 60-day route to a court with the burden on the person seeking relief; subd. 7, insurance available even where the operating agreement could not eliminate or limit liability under § 322C.0110, subd. 7 and whether or not indemnification would have been required; subd. 8, written report to members for indemnification or advances in a proceeding by or on behalf of the company; subd. 9, indemnification of other persons by contract); Minn. Stat. § 322C.0110 (subd. 2, the chapter governs where the operating agreement does not provide otherwise; subd. 7, authority to alter or eliminate indemnification provided by § 322C.0408, subd. 2 and to eliminate or limit liability for money damages, except for breach of the duty of loyalty, an improper financial benefit, a breach of a duty under § 322C.0406, intentional infliction of harm, and an intentional violation of criminal law); Minn. Stat. § 322C.0405 and § 322C.0409 (the duties compliance with which is a condition of indemnification under § 322C.0408, subd. 2(a)(3)); Minn. Stat. § 322C.0406 (liability for improper distributions, referenced in § 322C.0110, subd. 7(3)) (Minnesota Office of the Revisor of Statutes, 2025 Minnesota Statutes). The reading of § 322C.0110, subd. 7 stated above — that its five “except for” carve-outs qualify the liability-limitation clause rather than the indemnification clause — is an interpretation of the subdivision’s grammar, corroborated by the unqualified authority in § 322C.0408, subd. 4 to prohibit indemnification and advances outright; the statute does not say so in terms. Insurance coverage depends on the policy, not on this chapter. This article is general legal information about Minnesota law, not legal advice, and reading it does not create an attorney–client relationship. Whether indemnification or advancement is owed in a particular case depends on the operating agreement, the articles of organization, and the specific facts. No outcome is promised or implied.