2015 Wisconsin Act 295 Brings Changes to Wisconsin Partnerships
Wisconsin partnerships, including limited liability partnerships, could be governed by new statutory rules after January 1, 2018, thanks to the passing of 2015 Wisconsin Act 295 (the “Act”). The Act will apply to all partnerships formed on or after January 1, 2018. For partnerships formed prior to January 1, 2018, the partnership may elect: (i) to be governed by the Act as soon as July 1, 2016 by filing a statement of applicability with the Wisconsin Department of Financial Institutions (“WDFI”); (ii) remain subject to prior partnership laws by filing a statement of non-applicability with the WDFI; or, (iii) to do nothing and be subject to the Act as of January 1, 2018.
A summary of the Act’s highlights are listed below.
- A Partnership is a Distinct Legal Entity. Under the Act, a general partnership is recognized as a legal entity distinct from its partners. This means, for example, that a partnership may own property in the partnership’s name and the property is owned by the partnership and not the partners individually. Also, a partnership may sue and be sued in its own name. However, the recognition of a partnership as a distinct entity does not limit a partner’s liability. Partners of a general partnership are jointly and severally liable for all debts, liabilities and obligations of the partnership. (See below for updates concerning the liability of partners in a limited liability partnership.)
- The Partnership Agreement. The terms of the partnership agreement will control: (i) the relationship between the partners; (ii) the relationship between the partners and the partnership; (iii) the business and conduct of the partnership’s business; (iv) the method to amend the partnership agreement; and, (v) mergers, interest exchanges, conversions and domestications. If the partnership agreement does not address any of these areas, then the statutory provisions set forth in the Act will apply as the default rules.
However, the partnership agreement cannot modify many of the Act’s provisions, including, but not limited to: (i) expulsion of a partner by judicial order; (ii) dissolution; (iii) wind up of the partnership’s business; (iv) filing requirements with the Wisconsin Department of Financial Institutions (“WDFI”); (v) lawsuits by or against partners and the partnerships; (vi) a partner’s right of access to partnership books and information; (vii) a partner’s fiduciary duty and other duties; and, (viii) the applicable law governing a limited liability partnership’s internal affairs and the liability of its partners.
- Statement of Partnership Authority. A partnership may voluntarily file various statements with the WDFI, most notably a Statement of Partnership Authority. The Statement may grant or limit the authority of a partner to act on behalf of the partnership. It is effective for five years from its original date or from its most recent amendment or renewal. The Statement affects only the power of a person to bind the partnership with respect to third parties. If the Statement of Authority is filed with the Register of Deeds, it may also grant or limit authority of a partner to transfer real estate on behalf of the partnership. If the named person does not wish to have the authority granted in the partnership’s Statement of Authority, then that person may file a Statement of Denial with WDFI.
Other statements that may be filed with the WDFI include: (i) Statement of Dissociation of a Partner, which limits the authority of a dissociated partner; (ii) Statement of Dissolution, which gives notice that the partnership has dissolved and is winding up its business; and, (iii) a Statement of Termination, which gives notice that the partnership is terminated. A person who is not a partner is considered to have knowledge of the facts contained in the Statement of Dissociation, Statement of Dissolution or Statement of Termination 90 days after the Statement becomes effective.
- The Relationship of Partners to Each Other and to the Partnership. The Act explicitly describes a partner’s duties to the other partners and the partnership (including fiduciary duties of loyalty and care and the contractual obligation of good faith and fair dealing).
- Dissociation. A partner is dissociated from the partnership when: (i) the partner withdraws from the partnership or is expelled from the partnership; (ii) an event occurs that, under the terms of the partnership agreement, results in the partner’s dissociation; (iii) the partner becomes a debtor in bankruptcy, dies, has a guardian or conservator appointed for him or her, or is adjudged to be incapable of performing his or her duties under the partnership agreement; or, (iv) the partnership dissolves and completes winding up.
A partner’s dissociation from the partnership does not automatically dissolve the partnership. For example, dissociation of a partner as a result of the partner’s death dissolves the partnership only if, within 90 days after the death, at least half of the remaining partners affirmatively act to dissolve the partnership.
- Dissolution. The Act adds new grounds for partnership dissolution. For example, a partnership is dissolved and its business must be wound up if the partnership does not have at least two partners for 90 consecutive days. A partnership may rescind its dissolution unless it has already filed a Statement of Termination with WDFI or a court has ordered dissolution. If a partnership rescinds its dissolution and meets certain requirements, the partnership may resume carrying on its business as if dissolution had never occurred.
- Limited Liability Partnership Creation. Under the Act, a Wisconsin limited liability partnership must file a Statement of Qualification (rather than a Registration Statement) with WDFI. However, a foreign limited liability partnership must still file a Registration Statement with DFI to do business in Wisconsin.
- Limited Liability Partnership Annual Report Requirement. Limited liability partnerships will be required to submit an annual report with WDFI under the Act.
- Liability of Partners in a Limited Liability Partnership. In a limited liability partnership, a debt, obligation or other liability of the limited liability partnership is solely the debt, obligation or other liability of the limited liability partnership, not of the partners. Therefore, the partners are not personally liable for the debt, obligation or other liability of the limited liability partnership solely by reason of being a partner in the entity. However, the limited liability partnership may elect that a partner be liable for his or her own negligence or wrongful acts or for the negligence or wrongful acts of a person under the partner’s supervision and control.
In addition, a limited liability partnership’s failure to observe formalities relating to the exercise of its powers or management of its business is not grounds for imposing personal liability on a partner.
- Mergers, Conversions and Other Business Combinations. The Act authorizes partnership mergers, interest exchanges, conversion and other domestications, including “cross-species” transactions, with special protections for non-consenting partners.
Partnerships are encouraged to contact their legal advisor to determine how to navigate the Act’s provisions, including whether to opt-in or opt-out of the new laws and potential updates to the partnership agreement.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.