On January 8, 2021, Governor Mike DeWine signed Senate Bill 276 into law, creating Chapter 1706 of the Ohio Revised Code, known as the Ohio Revised Limited Liability Company Act (the “Act”). The Act went into effect on February 11, 2022. Chapter 1706 replaces the current act contained in Chapter 1705. The Act modernizes Ohio’s limited liability company laws, providing clarity, flexibility, and a new type of entity, while retaining the terminology and general structure relied upon in Chapter 1705.
The running theme of the Act is that it exists largely as a set of “default rules,” meaning they apply only when an LLC’s Operating Agreement is silent on a given area (with some exceptions). This promotes flexibility in allowing business owners to create their own operating agreements, eliminating many situations in which the law would override an agreement.
The Act now allows a person to become a member of an LLC without making a contribution, or otherwise having an economic interest in the LLC. Similarly, the Act allows enforceable rights to be conferred to third parties who are not members of the LLC.
Under the Act, all Ohio LLCs are now presumed to be Member-Managed, unless an LLC’s operating agreement states otherwise. Again, this empowers the flexibility of business owners to create their own governance structure within the operating agreement. Actual or apparent authority to bind the LLC is thus determined by the operating agreement. The default rule under the Act states that the LLC is governed by its members, and that matters within the ordinary course of business may be decided by a majority of the members. However, for certain actions, including amending the operating agreement, filing for bankruptcy or any action outside the ordinary course of business, consent of ALL members is required.
Previously, an Ohio LLC was unable to waive the fiduciary duties of its members, managers, officers, etc. Now, the Act allows an LLC to waive some or all fiduciary duties of its members, managers, or officers. The caveat is that these waivers must be included in a WRITTEN operating agreement (Operating agreements can take on many forms and are not required to be in writing to apply). The exception to this new rule is that the duties of good faith and fair dealing remain non-waivable.
Under the Act, Ohio becomes the 16th state to allow the creation of Series LLCs. A “series” LLC permits business owners to create a parent or umbrella LLC that has multiple “series” within the LLC, within which the series are all protected from claims and liabilities incurred by other series or the parent LLC itself. Each series is required to have either a) separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations and/or b) a separate purpose or investment objective. This may be beneficial for business owners participating in multiple lines of business under a single entity.
Previously, Chapter 1705.40 provided for relief as dissenting members pursuant to Sections 1705.41 to a) members of a limited liability company being merged or consolidated into another entity, b) members of a limited liability company who are entitled to vote with respect to the merger, but only as to their membership interests, or c) members of a limited liability company being converted. Chapter 1706 no longer provides these rights. However, these rights may be written into the operating agreement.
The new Act no longer contains specific language rendering members who receive a wrongful distribution liable to return the amount received to the company. In such cases, the law of fraudulent transfers now controls in place of the now-sunset Section 1705.23.
The new Act enables an Ohio LLC to cut off creditors and claims following dissolution of the company. To do this, the LLC must a) provide notice to known creditors at the time of winding up stating that each creditor must bring any claim that it may have by a certain deadline, which cannot be less than 120 days from the effective date of the notice; and/or publish a notice on the LLC’s principal website and send a copy of the notice to the Ohio Secretary of State’s Office for publishing on its website as well.
What Does It Mean For Your Business?
For existing LLCs, nothing will need to be done to become consistent with the new law. However, if a business owner wants to take advantage of the new Act, they should consult with an attorney to have their operating agreements amended in order to do so.