THE SSP FIRM BLOG
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Ohio’s Revised LLC Act Impacts Business Owners
Thursday, April 28, 2022
Authored by Kurt R. Friedmann and Andrea B. Neuwirth
On February 11, 2022, the Ohio Revised Limited Liability Company Act (the “Act”) went into effect, governing all domestic and foreign limited liability companies registered to do business in Ohio. The Act is a complete restatement of the previous laws governing Ohio LLCs, and as such, impacts every Ohio LLC. This article highlights only some of the Act’s significant changes to Ohio’s previous LLC laws. Ohio business owners and their advisors are encouraged to familiarize themselves with the entire Act to determine how it might specifically affect their existing and future LLC ventures.
Increased Flexibility in the Operating Agreement
The central change under the Act is that business owners and investors now have more flexibility in how they structure their LLCs in their operating agreements. Previously, operating agreements had to comply with default statutory rules absent permitted exceptions. Now, LLCs are governed by their operating agreements with some limited exceptions. This change gives business owners and investors the ability to say, “this is what we want to do” rather than “are we allowed to do this?”
Authority
An example of more flexibility presents itself with the authority to bind the company. Previously, a business owner had to make the distinction between operating as a “member-managed” LLC or a “manager-managed” LLC. Now, business owners have the ability to give any agent actual authority to bind the company under any title they choose (such as President, Manager, CEO, a Board of Directors, etc.) by any one of the following methods: (1) the operating agreement; (2) decisions of members in accordance with the operating agreement; (3) an authorization form filed with the Ohio Secretary of State; or (4) the Act’s default rules.
Changes to Default Rules – Management and Indemnification
The Act still provides default rules that will apply when an LLC does not have an operating agreement, or if an operating agreement fails to address a certain situation (with some exceptions). In the past, business owners may have relied on some or all of the default rules under the statute. However, some of the default rules have changed or have been revoked, so relying on them now may have unintended consequences. For example, Ohio’s former default rules concerning management structure said that all ordinary business decisions and most major decisions were made by a majority of the members relative to the amount of capital each member contributed to the LLC (i.e an owner or owner who contributed at least 51% of the capital). Now, if a business owner relies on the Act’s default rules, a majority number of members make most decisions, regardless of pro rata ownership (i.e. 2 out of 3 owners, even if the 2 concurring members collectively own less than a 50% interest). Most business owners who have contributed a significant portion of an LLC’s capital will likely want to keep decision-making authority, so relying on the new default rules may undermine their intent. Therefore, business owners who previously relied on the default management rules may consider implementing an operating agreement or updating its current one.
In addition, many business owners have relied on Ohio’s former default indemnification rules. Now, the Act permits LLCs to indemnify its members, agents and other persons in the LLC’s operating agreement, but it no longer provides default indemnification provisions in the statute. If the members, agents, and other persons want to be indemnified by the LLC for actions they have taken on behalf of the LLC, the operating agreement will need to expressly provide such provisions. Therefore, if a company’s current operating agreement depends on default statutory language for indemnification to the members, officers and agents, or does not expressly set forth that such members, officers and agents are indemnified from liability taken on behalf of the company, the company and its owners would need to update their operating agreement unless they do not want the members, officers and agents to be indemnified for acts taken on behalf of the Company.
Fiduciary Duties Can be Waived
The Act now gives business owners the ability to waive all the fiduciary duties of members, managers, and officers in an operating agreement, including the fiduciary duty of loyalty and care, but not the implied covenant of good faith and fair dealing. Business owners might consider waiving fiduciary duties when they are engaged in multiple ventures that otherwise present a conflict of interest. Minority and passive investors on the other hand, should be weary of broad waivers which may limit legal remedies.
Penalties Issued by the Ohio Secretary of State
Previously, an unregistered foreign (out of state) LLC operating in Ohio was not fined for failing to register with the Ohio Secretary of State. Under the Act, unregistered foreign LLCs doing business in Ohio are now subject to penalties, injunction, or other enforcement measures. The Act also adopts fines and penalties for registered LLCs (domestic and foreign) which fail to update statutory agent information with the Secretary of State. If an LLC’s statutory agent information is incorrect, the Secretary of State has authority to cancel the LLC’s registration and can only return to active status by filing reinstatement documents and paying a penalty. Business owners are encouraged to verify their LLC’s registration status and statutory agent information on an ongoing basis to ensure compliance.
Series LLC
One of the more notable changes in the Act is that Ohio LLCs can be formed or reorganized as a “Series LLC”. A Series LLC allows a business owner to establish one or more series of assets organized under a parent (also called “master” or “umbrella”) LLC. If utilized correctly, only the parent LLC is registered with the Ohio Secretary of State, whereas the individual “series” of LLCs are set forth and established within the LLC’s Articles of Organization and operating agreement. Even though Series LLCs are not registered with the Secretary of State, they can each have their own name, members, management structure, powers, and/or purpose. Series LLCs are often used in in the real estate sector to separate liability between properties, and in the investment management sector to separate investment portfolios. While attractive in theory, series LLCs are still a relatively new concept (only about 1/3 of the states have adopted it) so the practical benefits and ability to shield liability outside Ohio is debatable. Furthermore, it is still unclear whether series LLCs will be taxed as separate entities.
Conclusion
There are many more changes to Ohio’s LLC laws above and beyond what is highlighted in this article and Ohio business owners and their advisors are encouraged to review the Act in its entirety to ensure that their governing documents and operating agreements comply with the new laws and current business practices. The Act can be found in Chapter 1706 of the Ohio Revised Code.
If you have any questions about any of the information contained in this blog, contact Kurt Friedmann by phone at 513-533-2473 or by email at krf@sspfirm.com.
Advertisement Only. Content in this blog was accurate and researched as of the date published. This article is provided for informational and educational purposes only and should not be considered legal advice. It does not create an attorney-client relationship between SSP and the reader. Readers are encouraged to seek legal advice from their own legal counsel.
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