The Ohio legislature has recently passed a comprehensive overhaul of the laws governing Ohio limited liability companies, which will take effect on February 11, 2022. Existing Ohio LLCs, particularly multi-member LLCs, should pay close attention to the changes and seriously consider amending their operating agreements to reflect these changes. Learn more about these Ohio law changes for LLCs below.
One significant change in the Ohio law changes for LLCs, called the Ohio Revised Limited Liability Company Act (“ORLLCA”), is the explicit and more detailed attention paid to LLC operating agreements. It’s been a general principle of law that an LLC can use an operating agreement to deviate from most of the default rules set by the legislature, but the existing law barely mentions operating agreements. The ORLLCA has many more provisions addressing operating agreements and what can and cannot be done with them.
Duties to the LLC
Another change that the ORLLCA will implement is to the various duties that members owe to the LLC. Typically, a member owes three fundamental duties to the company: the duty of loyalty, the duty of care, and the duty of good faith and fair dealing. Under the current law, an LLC cannot eliminate any of these duties, even through the operating agreement. Under the ORLLCA, an LLC operating agreement will be able to eliminate the duties of loyalty and care, although it cannot eliminate the duty of good faith and fair dealing.
A third key change in the ORLLCA is how an LLC specifies functional roles for the members. Typically, any member can represent the LLC, sign contracts on its behalf, etc. Consequently, if only certain members are going to have managerial powers, it’s important for an LLC to use the operating agreement to identify which members are going to have various powers or fulfill certain roles. The ORLLCA doesn’t fundamentally change that notion, but it does lay out new parameters that must be met in order for a member, manager, officer, or director to have the power to bind the LLC (i.e., sign contracts or make commitments for the LLC). To have such power, the person must:
- Be authorized to act as an agent of the LLC pursuant to the operating agreement;
- Have been authorized by all of the LLC’s members;
- Be an authorized agent and have had such appointment as an agent filed in a Statement of Authority with the Ohio Secretary of State; or
- Have such authority as provided by some law other than the ORLLCA.
Therefore, going forward the LLC should either explicitly identify roles and functions in the operating agreement, or file a Statement of Authority with the Ohio Secretary of State, which is a new kind of filing. Even if the LLC opts to have the authority of certain persons approved by all of the members, that approval should be documented through a written resolution, signed by all the members.
Penalizing a Member for Non-Performance
A fourth change is that an operating agreement may provide that a member who fails to perform in accordance with, or comply with the terms of, the operating agreement is subject to specified penalties, including:
- reducing or eliminating the defaulting member’s proportionate interest in the LLC;
- subordinating the member’s membership interest to that of non-defaulting members;
- forcing the sale of the member’s membership interest;
- forfeiting the defaulting member’s membership interest;
- fixing the value of the defaulting member’s membership interest by appraisal or by formula, and redemption or sale of the membership interest at that value.
This gives LLCs extensive latitude to create accountability among the members, with potential consequences of a member having his or her ownership reduced or eliminated for failure to meet those standards.
Adoption of Asset-Based Series LLCs
The last big change to note is that Ohio is adopting “asset-based series LLCs,” something that several other states have already implemented. Conceptually, a series LLC is like a company with different divisions, but with a twist – each series (or division) can have separate assets, separate members, separate allocations of profits and losses, and separate liabilities. It’s similar to having multiple LLCs under one roof. Debts, liabilities, and obligations with respect to one series are enforceable only against the assets of that series, and not against the assets of the LLC generally or of any other series, and vice versa, provided certain requirements are met:
- Each series keeps separate records;
- The operating agreement contains a statement about the separate debts, liabilities, and obligations; and
- The articles of organization contains a statement that the LLC may have one or more series of assets subject to separate debts, liabilities and obligations.
A good example of how this works is in the area of real estate: this will enable the LLC to hold different properties in separate series, with investors unique to each series, rather than setting up a new LLC for each property. The same idea applies to companies with diverse product lines, or retailers with multiple locations, etc. Assets of a series can be held in the name of the LLC or in the name of the series.
These are very fundamental changes to Ohio law and to how LLCs work, and therefore we recommend that anyone with an LLC, particularly a multi-member LLC, revise their operating agreements in the next few months to incorporate those changes that would be beneficial to their company. Contact Kinetic Law today for assistance.