Mark Stall – firstname.lastname@example.org
June 5, 2021
In January 2021, the Ohio Revised Liability Company Act was signed into law. The legislation overhauls and modernizes Ohio’s limited liability law by completely replacing Ohio Revised Code Chapter 1705 (“Current Law”) with a new Chapter 1706 (“New Act.”) Effective on January 1, 2022, the New Act will govern all Ohio LLCs and non-Ohio LLCs operating in Ohio. Although the New Act contains similar terminology to the Current Law, there are multiple substantive differences, including those outlined below, which will affect all LLCs in different ways given that each LLC is governed by its own operating agreement.
Under the Current Law, there are two distinct governance structures – member managed and manager managed. The Current Law also specifically delineates members’ and managers’ authority to take certain actions on behalf of the LLC (generally subject to modifications in the underlying operating agreement.) The New Law provides a much more flexible approach to governance by providing a person’s authority to bind the LLC based on the person’s authorization instead of their title. Under the New Act, a person’s authority is established in one of several ways: (1) in a manner consistent with the operating agreement; (2) in accordance with the New Act; (3) in a statement of authority filed with the Ohio Secretary of State; or (4) under the New Act’s “default provisions.” This new approach allows an LLC to implement a governance structure which best fits its unique needs. For example, an LLC could adopt a corporate like “board of directors” governance structure.
A significant change in the New Act involves authorization of “series” LLCs. The New Act permits an LLC to establish, through its operating agreement, one or more separate and distinct “series” of assets and liabilities under the parent LLC. A series LLC structure provides that the liabilities and obligations of a particular series are only enforceable against that series, and not enforceable against other series or the parent LLC. Ohio is one of only 15 states authorizing series LLCs. The series structure is useful in a limited number of circumstances, such as real estate investment property, but can offer administrative cost and tax advantages.
Statutory Agent Penalty
The New Act provides that the Ohio Secretary of State will provide notice to registered LLC when they fail to consistently maintain a statutory agent and/or fail to update such agent’s contact information with the Ohio Secretary of State. If the LLC fails to provide updated information within 30 days following notice, the Ohio Secretary of State will cancel the LLC’s articles of organization or the foreign registration, and the LLC will be required to apply for reinstatement, pay a filing fee and update its statutory agent’s information. Cancellation of the LLC may be risky as it could expose its members to personal liability.
Foreign LLCs Transacting Business Without Registration
The New Act provides the Ohio Attorney General with new enforcement powers in dealing with foreign LLCs that have not registered to transact business in Ohio. Under the Current Law, an unregistered foreign LLC is unable to maintain a lawsuit in Ohio courts. Under the New Act, an unregistered foreign LLC conducting business in Ohio will be liable for a fee in an action brought by the Ohio Attorney General. The action could also result in an injunction against the foreign LLC, court costs and interest.
Under Ohio’s Current Law an LLC’s members cannot eliminate the fiduciary duties of loyalty, care and good faith and fair dealing, although some duties may be modified to a certain extent in the operating agreement. Under the New Act, all fiduciary duties can be eliminated through the operating agreement, except for the duty of good faith and fair dealing when dealing with the LLC or other members. In the future, members will want to make sure they understand their duties and those owed by other members, as well as managers and officers. “Passive members” will want to carefully review the LLC’s operating agreement to ensure their rights against the LLC’s management have not been inappropriately restricted.
Penalties for Failure to Perform
The New Act permits an LLC to incorporate specific penalties and consequences in the operating agreement which will apply if a member breaches the operating agreement or upon the occurrence of certain triggering events. These penalties and triggering events could have significant consequences, including without limitation, reducing or eliminating a defaulting member’s interest in the LLC or forcing a defaulting member to sell their LLC interest on terms mandated by the operating agreement. These new penalties could provide significant new options for majority members to maintain ownership and operational control.
The Current Law and the New Act provide that the relationship between members and the LLC are generally governed by the LLC’s operating agreement. If an LLC does not have an operating agreement, the default provisions of both the Current Law and the New Act govern. However, there are significant differences in the default provisions of the Current Law and the New Act which make it more important than ever that an LLC has an operating agreement in place which is consistent with its members’ intent. For example, the default provisions contained in the Current Law and the New Act address important topics, such as members’ entitlement to receive distributions and management rights, in entirely different ways.
This article is not intended to be a comprehensive analysis of the New Act, and as with all new laws there are questions and clarifications which will resolved over time as the New Act goes into effect. However, those involved with LLCs are encouraged to use the coming months s as an opportunity to evaluate how the New Act will affect existing LLCs and to be formed LLCs.