On January 8, 2021, Governor Mike DeWine enacted the Ohio Revised Limited Liability Company Act ("Revised Act"). The Revised Act, which repealed and replaced Chapter 1705 of the Ohio Revised Code ("Original Act") with the new Chapter 1706, went into effect on February 11, 2022, and is the first comprehensive overhaul of the Original Act since its enactment in 1994. Largely based on the American Bar Association's Prototype Limited Liability Company Act, the Revised Act is product of the combined efforts of the Ohio State Bar Association and state lawmakers, including primary bill sponsors Senator Kristina Roegner (R-Hudson) and Nathan Manning (R-North Ridgeville).
The Revised Act modernizes LLC law in Ohio and brings the Revised Code more in line with other states. Applicable to both domestic (Ohio) and foreign (non-Ohio) LLCs, the Revised Act serves to create new opportunities for businesses and incentivize economic development within the state. From new filing requirements to an entirely new permissible entity form, this Post summarizes the key new provisions of the Revised Act for existing and prospective business owners looking to benefit from Ohio's modernized LLC law.
Implementation of Series LLCs
Idaho was the first state, and the Buckeye State is now the fifteenth state, to introduce the Series LLC concept. A Series LLC largely mirrors a parent-subsidiary relationship — the LLC's operating documents authorize one or more entities, or "series," to hold certain assets or liabilities of the LLC. While a Series LLC can be for-profit or non-profit, under the Revised Act, the LLC must have at least one of the following qualities: (1) separate rights, powers, or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations, and/or (2) a separate purpose or investment objective than that of the parent LLC. Further, each series must have at least one member associated with it.
Series LLCs have streamlined organizational and registration requirements. Each series operates as a distinct entity and can enter binding contracts, maintain lawsuits and be sued, and hold title to and convey assets. Additionally, another major benefit of a series LLC is that liabilities of a particular series are only enforceable against the assets of that series — the parent LLC is shielded from creditors "down" the series. In order to utilize this protection, business owners must ensure that their operating documents properly allow for the creation of series.
New Registration Requirements
Under the previous law, unregistered LLCs were able to transact business in Ohio without fear of incurring any penalty, with being unable to maintain a lawsuit in state court as the only limitation. The Revised Act mandates that all LLCs register with the Secretary of State and, further, imposes a fine on LLCs who fail to properly register. In addition to this new penalty, the Revised Act codifies a grant of enforcement authority to Ohio Attorney General to seek an injunction to prevent unregistered LLCs from transacting business in the state and recover court costs and accrued interest. Of note, the Revised Act imposes the same registration requirements on foreign LLCs as domestic LLCs and subjects them to the same penalties.
Cancellation for Failure to Maintain Statutory Agent
The Revised LLC Act requires all domestic and foreign LLCs to appoint and continuously maintain a statutory agent in Ohio who is authorized by the LLC's operating documents to accept service of process on behalf of the company. If the agent changes their name and/or address, is removed, resigns, or dies, the LLC must update the agent's information with the Secretary of State or appoint a new agent. Failure to do so within the 30-day opportunity to cure period will cause the Secretary of State to cancel the LLC's registration, subjecting the business to penalties and preventing it from legally transacting business in the state.
Revisions to Governance & Duties
New Flexibility in Governance
The Original Act provided that LLCs would be either manager-managed or member-managed. The Revised Act does away with that distinction and allows an individual LLC's operating agreement to control how the entity will be governed. Accordingly, LLCs are now free to implement a management structure that fits their business needs, whether that takes the shape of traditional forms or mirrors other entity forms, such as a board of directors structure commonly found in for-profit corporations.
Fiduciary Duties Revisions
Under the Original LLC Act, a company could not entirely eliminate the fiduciary duties of their members, managers, or officers. The Revised Act permits LLCs to eliminate nearly all of the fiduciary duties imposed on members, managers, and officers. Consistent with the Original Act and unique to Ohio, the implied duty of good faith and fair dealing is the only fiduciary duty that is non-waivable under the law. This component of the Revised Act affords companies enhanced flexibility to structure their LLCs to their unique business needs.
Member Penalty Provisions
The Revised Act permits LLCs to institute in their operating agreements statutorily proscribed penalties for members who breach provisions of their operating agreement or upon the occurrence of certain enumerated events. A first for Ohio, examples of these penalties include: (1) forcing a sale of a member's interest; (2) reducing or eliminating a member's interest; or (3) fixing a defaulting member's interest by a proscribed formula or through appraisal and, subsequently, forcing a sale of the interest at that determined value. These provisions are powerful for business owners as they enhance the contractual penalties that can be imposed on members through an operating agreement and help eliminate situations where certain members can stymie various matters in the organization through detrimental conduct.
Members Without Economic Interests
Impermissible in the Original Act, the Revised Act allows a person or entity to be a member of an LLC without a capital contribution or having any other economic interest within the entity. Further, these members can have enforceable rights to third parties without having an economic interest. From special advisor arrangements to instances where creditors want consent of an independent party for certain transactions, this new provision underscores the enhanced flexibility lawmakers wanted LLCs to be able to utilize in hopes of fostering increased economic development.
Changes to Creditor Claims
The Revised Act affords LLCs the ability to bar claims after dissolution and wind up. In order to invoke these protections, an LLC must: (1) provide notice to known creditors imposing a deadline for claims of no less than 120 days from the effective date of the notice after the LLCs wind up commences; and/or (2) provide notice to the Secretary of State and on the LLCs website (if applicable) to apprise unknown or potential creditors that claims must be brought within two years or they will be permanently barred. This new protection, not afforded under the Original Act, provides new certainty and finality regarding creditors during and after dissolution and wind up of LLCs in the state.
New & Revised Secretary of State Forms
The Revised Act changes the filing forms required for LLCs and, accordingly, the Secretary of State will no longer accept prior forms on or after February 11, 2022. The following forms are now available for all LLCs doing business within the state: Articles of Organization (Form 610); Certificate of Amendment or Restatement (Form 611); Certificate of Correction (Form 612); Statement of Authority (Form 613); Amendment or Cancellation of a Statement of Authority (Form 614); Statement of Denial (Form 615); Certificate of Dissolution (Form 616); Registration of a Foreign LLC (Form 617); Certificate of Cancellation of Registration of a Foreign LLC (Form 618).
This broad overview of the Revised Act is not exhaustive, as the Revised Act brings numerous smaller changes in the name of increased flexibility for businesses to tailor their entities to their specific needs. As business owners acquaint themselves with the new landscape provided under the Revised Act, questions on how the Revised Act can benefit their company will arise. Faruki+ has a team of attorneys dedicated to helping existing and prospective clients take full advantage of all the Revised Act has to offer for your business. Contact a Faruki+ attorney should you have any questions or wish to dive deeper into the Revised Act's potential benefits for your LLC.