Ohio Adopts New Limited Liability Company Act

On February 11, 2022, the Ohio Revised Limited Liability Company Act (the “New Act”) will be applicable to all Ohio limited liability companies. The New Act completely replaces the existing Ohio Limited Liability Company Act codified in Chapter 1705 of the Ohio Revised Code with new Chapter 1706 of the Ohio Revised Code. The New Act places an emphasis on allowing businesses to conduct themselves according to their needs and protecting business members. The following article will provide a high-level summary of several changes made by the State legislature to retool Ohio’s LLC laws.

Operating Agreements: An LLC’s operating agreement outlines certain business and functional rules among members and the LLC. Provisions of the New Act will be the default provisions should the operating agreement fail to address a specific situation. The New Act permits a person to be a member of an LLC without making any asset or capital contribution to the LLC or having an economic interest in the LLC. The New Act also allows an LLC’s operating agreement to outline enforceable rights to third parties who are not members of the LLC. These concepts will likely come into play in special purpose entities whereby authority is given to non-members in order for the LLC to take certain actions.

Fiduciary Duties: Under existing law, an LLC may not eliminate the fiduciary duties of its members, managers or officers. The New Act allows an operating agreement to limit or eliminate the “default” fiduciary rules governing its members, managers or officers. The only duties that may not be eliminated are the implied covenant of good faith and fair dealing. This may come into play where members of an LLC want additional flexibility to compete directly with the LLC or devote time to another business.

Series LLCs Permitted: The New Act permits the formation of series LLCs in Ohio. A “series LLC” permits the creation of multiple distinct entities under the name of a single LLC. This concept is akin to the parent-subsidiary structure whereby one entity may be broken down into separate pieces to protect the company’s assets, however, the difference is that a series LLC will likely save businesses time and money. Unlike a parent-subsidiary LLC, a series LLC does not require the registration of multiple LLCs. Instead, a series LLC only requires the registration of one LLC, divided into series pursuant to its operating agreement. In establishing a series LLC, the Articles of Organization must specifically authorize the series structure. Each series, in its own name, may enter into contracts, hold and convey title, grant liens and security interests and sue or be sued.

Management Structure and Authority: In the interest of granting business members more say over conducting their own affairs, the New Act eliminates the distinction between member-managed and manager-managed LLCs, and it allows members of an LLC to organize their business as they see fit. The LLC’s governance structure may be authorized in the operating agreement or by decision of the members in accordance with the operating agreement. Under the New Act, an LLC could implement a governance structure similar to a for-profit corporation, such as a board of directors.

Conclusion: The New Act rewrites how members of an LLC may govern and operate their business. In accordance with these changes, members may now tailor their business operations in accordance with their specific needs and intentions. The attorneys at Palecek, McIlvaine, Hoffmann & Morse are available to assist with drafting or editing your LLC documents to comply with the New Act and to better tailor your LLC’s governing documents to meet your needs. Should you have any questions or need any assistance, please contact the attorney listed above for more information.