What You Need to Know About the New Ohio LLC Act
If you own an Ohio limited liability company (LLC), or are thinking of organizing an Ohio LLC, you will want to take advantage of the flexibility to craft the LLC’s organization and administration through a written operating agreement. Ohio has adopted a new LLC Act that will apply to all new and existing LLCs organized in Ohio, effective January 1, 2022. The new LLC Act broadens the authority LLC owners have to “write their own rules” in the LLC’s operating agreement, while also maintaining default rules that apply in the absence of a provision in the operating agreement to the contrary. The net effect is enhanced autonomy for LLC owners, provided they take advantage of that opportunity by adopting or amending the LLC operating agreement. Highlights of some of the changes are identified below.
Management
Existing Ohio law requires LLCs to be designated as member-managed or manager-managed, with authority over the LLC being dependent on the applicable choice. The new LLC Act eliminates these categories, and gives broad latitude to the members to designate the respective authorities of persons and entities through the operating agreement. Absent that designation, all authority over the LLCs rests with the members. While implied in the past, the new LLC Act clearly authorizes LLCs to adopt alternative management structures, such as a traditional corporate structure with a board of directors and officers.
Expulsion of Members
Expelling a member has the consequence of removing all authority of that member over the LLC, while allowing the member to retain his or her economic interest. Expulsion has traditionally been rare, because: (i) existing law only permits expulsion under circumstances specifically identified in the operating agreement; and (ii) most LLC owners do not want to address expulsion in the operating agreement, given it is far from their minds when starting a new venture. The new LLC Act creates a default rule that allows the LLC to seek a court order for expulsion of a member if that member has engaged in wrongful conduct that adversely affects the LLC, or if that member has willfully or persistently committed a material breach of the operating agreement or a material breach of his or her duties under applicable law. This is now the rule, unless the members eliminate or restrict its application in the operating agreement. While each circumstance is different, we believe many LLC owners would find these expulsion rights too broad, and would prefer either eliminating them outright, or placing limitations on them, such as requiring notice to the member and a right of the member to cure the purported wrong. It is of particular concern given the new LLC Act grants any member the right to maintain a lawsuit on behalf of an LLC. Meaning, it is possible for a minority LLC owner to seek to expel a majority LLC owner.
Access to Books and Records
Traditionally, each member of an LLC has had the right to inspect the books and records of the LLC upon request. This has been a right that could not be eliminated in the operating agreement, although the operating agreement could place reasonable limitations on that access. Under the new LLC Act, member access to the books and records of the LLC can be completely eliminated, or broadly restricted, in the operating agreement. Adoption of broad restrictions could be appropriate in a number of circumstances, particularly LLCs that have investor members not involved in the day-to-day operations.
Series LLCs
With the new LLC Act, Ohio joins a growing list of states that authorize “series LLCs”. In short, a “series LLC” is one LLC, formed with the state, that is treated as consisting of multiple entities. Each underlying entity is considered the holder of its designated assets, and is treated as being separate from the others for liability purposes. Each underlying entity can also have different ownership, so long as at least one member has ownership in all of the underlying entities. Theoretically, a series LLC could house the entire, traditional asset protection structure, including the operating entity, the real estate holding entity, the transportation equipment entity, and the like. While we believe the series LLC feature is a good tool for LLC owners to have, the separate liability of each underlying entity has not been thoroughly tested in court, and until it is, most owners are better off obtaining asset protection through the more traditional route of organizing multiple, separate LLCs.
Non-Member Rights
The new LLC Act allows an LLC’s operating agreement to give rights to persons or entities that have no economic interest in the LLC. This could have several potential uses. It would, in the succession planning world, allow one generation of family members to completely divest their interests in the LLC to the next generation of family members, while still retaining certain authority or control over the LLC. It could also be a tool for lenders to use in overseeing their LLC borrowers.
Penalties for Non-Compliance
It has been common practice for LLCs to have operating agreement provisions that provide penalties for members, in particular a member’s failure to make mandatory capital contributions. Under existing law, it was implied that a reasonable penalty would be enforceable. The new LLC Act explicitly authorizes the adoption of any penalty provision in the operating agreement.
If you are interested in discussing how these changes may impact your LLC or an LLC you contemplate establishing, feel free to reach out to a FGKS Law business and commercial attorney.
