Organizing Minnesota Business Entities – Minority Interests

Law FirmsMost business entities organized in Minnesota have historically been corporations and limited liability companies, also known as an “LLC.” If the business is solely owned by one individual, it is easy to organize with minimal help from an attorney or other professionals. The difficulty arises when there is more than one shareholder or LLC member. In that event, particularly if one such shareholder or member owns less than 50% of the outstanding stock or members interests, different attorneys separately representing each shareholder or member should be retained. Quick preparation of organization documents for filing with the Minnesota Secretary of State is not wise. The owner of the minority interest, in particular, must be assured of protection against the arbitrary and self-serving actions of the person or persons owning more than one-half of the outstanding ownership interests.

Although minority owners were generally protected by Minnesota courts from oppression by the majority for decades, that is less likely today, particularly due to the use of “Special Litigation Committees,” often referred to by its initials. SLCs have typically eliminated much of the former protections available to minority owners, particularly against the majority owner increasing his own compensation, diverting funds to other organizations he exclusively owns, reimbursing himself for personal expenses and employing relatives not sufficiently skilled for the posts, and compensation paid to them. In addition, fiduciary duties among shareholders and LLC members are often less comprehensive than at least one other entity now available and identified as a limited liability partnership, which is a general partnership electing to have limited liability for all its partners. This fairly new election allows use of the long established general partnership form of business relationships which could eliminate much of the possible oppression of minority owners otherwise available to the majority owner in corporations and LLCs. With the recently enacted protection of limited liability for all its partners (owners) the risk of unlimited liability associated with general partnerships is avoided. The limited liability partnership is more complicated and expensive to create with various required agreements and usually separate attorneys drafting and negotiating the documents, but will protect all owners against oppression by a majority owner or owners.

Certainly, organizing a corporation and issuing shares, ignoring the possible problems of tyranny by the majority owner(s) is simple, less expensive and quicker, sometimes accomplished without legal counsel. But it ignores protections each owner should have and generally gives the majority owner free access to a disproportionate share of cash flow and assets of the venture. That “easy way” is great for the majority owner(s), but not so good for the minority.

It is also possible a majority owner, who typically provides much of the financing for the venture, will refuse to accept suggested terms which protect minority interests and will not reasonably negotiate alternatives. Frankly, it’s better to know that attitude before the minority owners invest money and the most important and diminishing asset, their time as sweat equity in the venture. Chances are great the majority owner will be using his power to the disadvantage of the minority in the future. Perhaps the prospective minority owners should look elsewhere for their long-term commitment to a venture.

 

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