By: Edmund G. Kauntz, Esq. and Nathaniel D. Tucker, Esq
On January 8, 2021, Governor Mike DeWine signed the Ohio Revised Limited Liability Company Act (the “Revised Act”) into law. The Revised Act replaces the existing Ohio Limited Liability Company Act (the “Old Act”) under Ohio Revised Code (“R.C.”) Chapter 1705 with a new Chapter 1706. Effective February 11, 2022 the Revised Act applies to all limited liability companies (“LLCs”) formed or registered to do business in Ohio prior to, on or after that date. The Revised Act maintains many characteristics of the Old Act including terminology, not requiring an annual reporting, and maintaining the anonymity of members and managers. However, the changes under the Revised Act are designed to provide LLCs more flexibility for their operations and management.
The most significant changes under the Revised Act are the following:
- The addition of series LLCs;
- Changes to the default LLC rules;
- Flexibility in determining the management of the LLC;
- The ability to eliminate fiduciary duties;
- Penalties for a member’s failure to perform under the operating agreement; and
- Cancellation for not maintaining a registered agent.
The Revised Act’s most significant change is the introduction of series LLCs, which are LLCs that can establish one or more series of separate assets under one parent or umbrella LLC. Each series of a series LLC must have either: (1) separate rights, powers, or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations, and/or (2) a separate purpose or investment objective. Each series must also have at least one member associated with it.
The advantage of a series LLC is that it gives its members the ability to protect separate assets and/or lines of business from the risks associated with other LLC assets and/or lines of businesses. Under the Revised Act, the liabilities of one series are unenforceable against the assets of another series or the assets of the umbrella LLC. Likewise, the liabilities of the umbrella LLC are not enforceable against a series. However, for this rule to apply, three conditions must be met:
- Separate records must be maintained for each series;
- The operating agreement must contain a statement describing the liability enforcement limitation; and
- The articles of organization must contain a statement authorizing the LLC to have one or more series of assets.
Series LLCs are similar to parent or holding company LLCs with one or more subsidiary LLCs, which limit risk by separating each line of business or asset into separate LLCs. However, series LLCs will require less filings thereby reducing the administrative burden on business owners, and series LLCs may reduce setup and administrative costs too. Overall, series LLCs will be very useful for asset protection for real estate investment companies or businesses with multiple product or service lines. However, under current IRS guidance, each series must file its own federal income tax return (unless it has only one member and does not elect to be treated as a corporation).
CHANGES TO DEFAULT LLC RULES
Under the Old Act, almost every section of R.C. Chapter 1705 had default rules that applied unless the LLC’s operating agreement provided otherwise. The Revised Act removes this repetitive language and replaces it with one provision whereby if the LLC’s operating agreement is silent, then the Revised Act applies. It also provides a list of provisions that cannot be modified by an operating agreement, which includes the following:
- Altering the nature of an LLC as a legal entity separate from its members;
- Restricting the rights of a person other than a member or assignee;
- Varying the power of a court order;
- Eliminating the implied covenant of good faith and fair dealing;
- Eliminating or limiting the liability of a member, manager, or officer for violation of the covenant of good faith and fair dealing;
- Waiving the requirement that a member’s capital contribution promise be set forth in writing signed by such member;
- Waiving the prohibition on issuance of membership certificates in bearer form; and
- Waiving the Revised Act’s requirements (listed above) for an LLC to maintain series LLCs.
Overall, the Revised Act has fewer restrictions on operating agreements, thereby providing members with greater flexibility in negotiating and structuring the LLC.
The Old Act allowed for LLCs to be either member-managed or manager-managed. However, the Revised Act does away with this distinction. Instead, it provides that a person can be authorized as an agent to bind the LLC only by: (1) authorization under the company operating agreement, (2) a “statement of authority” filed with the Ohio Secretary of State, or (3) under the Revised Act’s default rules. This change increases flexibility by expressly allowing various management structures including Directors, Managers, Officers, etc.
Under both the Old Act and the New Act, an LLC will dissolve if it has no members. To prevent this, an LLC might appoint a “springing member” under its operating agreement. A springing member is a member with no economic interest or rights in the LLC that becomes the sole member only if all other members cease to be members, thereby preventing an inadvertent dissolution. The Old Act required a member to have an economic interest in the LLC, so springing members were not permitted. However, the New Act allows springing members because it expressly permits a person to be admitted as a member (even the sole member) without having any economic interest or rights in the LLC.
ABILITY TO ELIMINATE FIDUCIARY DUTIES
The Revised Act provides an LLC the ability to limit or eliminate the fiduciary duties of its members, managers, or officers under its operating agreement. Under the Old Act, an LLC could limit, but could not eliminate, these fiduciary duties. As such, the Revised Act provides additional flexibility to LLCs. However, the Revised Act does not permit an LLC to limit or eliminate the implied covenant of good faith and fair dealings.
PENALTIES FOR A MEMBER’S FAILURE TO PERFORM
The Revised Act also provides that, under the LLC’s operating agreement, a member may be subject to penalties for failure to perform under the operating agreement or upon the time or happening of certain events specified in the operating agreement. Such penalties may include: (1) a reduction or elimination of the member’s proportionate interest in the LLC, (2) forcing a sale of the member’s interest, (3) fixing a value on the member’s interest by appraisal or formula and then forcing a redemption or sale at such value, or (4) any other penalty.
CANCELLATION FOR NOT MAINTAINING A REGISTERED AGENT
Under the Old Act, LLCs are required to have a statutory agent in Ohio to accept service of process, but there is no statutory penalty for not having one. However, the Revised Act authorizes the Ohio Secretary of State (the “Secretary”) to issue a notice to any LLC without a statutory agent and provide it 30 days to correct. If the LLC does not correct, then the Secretary is authorized to cancel the LLC’s articles of organization. However, the articles of organization can be reinstated if the LLC appoints a new statutory agent.
DO YOU HAVE QUESTIONS ABOUT THE OHIO REVISED LIMITED LIABILITY COMPANY ACT?
While this client advisory is intended for informational purposes only and is not legal advice, we encourage you to call your SMDK attorney for advice regarding your specific situation. We are available to assist you in answering questions about the Ohio Revised Limited Liability Company Act and how it applies to your business.