New Rules on Ohio LLCs

This Week's Quote:

“Life has got all those twists and turns. You’ve got to hold on tight and off you go.”
                                  -Nicole Kidman
 
This week’s article highlights some key parts of the Ohio Revised Limited Liability Company Act which took effect on February 11th. It constitutes the biggest change to Ohio’s LLC law since its inception in 1994. It is a good starting point for LLC owners in understanding the biggest changes and offers key takeaways at the end to avoid any missteps in adjusting to the new rules.
 
-Jordan Bradstreet
 
 The Ohio Revised LLC Act: What You Need to Know

The Ohio Revised Limited Liability Company Act (the “New Act”) took effect on Feb. 11, 2022. The New Act replaced Chapter 1705 of the Ohio Revised Code with Chapter 1706, thereby redrafting all Ohio statutory LLC law. The New Act is Ohio’s first comprehensive overhaul of its LLC laws since the original LLC Act took effect in 1994. Now that it is a little more than a month old, practitioners are gaining familiarity with the New Act.

Lawmakers intend for the New Act to modernize Ohio LLC laws and provide increased opportunities and freedom for business owners using the LLC structure. Mindful of the burden a statutory overhaul places on business owners, the New Act is designed to allow for a seamless transition from the previous act. Business owners should be aware of several key aspects of the New Act:

1. The New Act Allows for Greater Flexibility in the Management Structure of an LLC

The New Act removes default provisions requiring LLCs to be either member-managed or manager-managed. This allows Ohio LLCs, in their operating agreements, to create a management structure that works for them. Whether that management structure conforms to the previous act or incorporates other corporate governance mechanisms is left up to the drafters.

2. The New Act Establishes Series LLCs for Risk and Asset Allocation

The New Act also establishes series LLCs. In its operating agreement, an LLC may designate certain assets and liabilities as part of a series (Section 1706.76). The New Act states that the debts and liabilities of the series assets are only enforceable against the series and not the LLC as a whole. Series LLCs effectively separate assets and risks as if they are in different entities without the burden of creating new entities.

3. The New Act Provides for Default Provisions and Centralizes Overriding Provisions

The New Act contains select provisions that cannot be modified by an LLC’s operating agreement. All such provisions are located in one section of the New Act for both ease of reference and clarity (Section 1706.08). Therefore, the remainder of the New Act sets forth default provisions that only apply if the LLC’s operating agreement does not provide otherwise. This allows drafters flexibility in creating an operating agreement and also permits most Ohio LLCs to retain their current operating agreements.

4. Statements of Authority Define a Person’s Specific Authority With Respect to the LLC

The New Act creates “Statements of Authority” (Section 1706.19). This novel provision allows an LLC to file a statement with the Ohio Secretary of State setting forth a person’s authority to enter into transactions on behalf of the LLC. The Statement of Authority may also be submitted for all persons holding a specific role within the LLC. Third parties may rely on the Statement of Authority as conclusive evidence that the person executing a transaction has the authority to do so.

5. Future Changes to Ohio Business Entities

There may be additional changes to Ohio’s business entities in the near future. The Ohio State Bar Association’s Corporation Law Committee has indicated its intention to propose amendments to modernize Chapter 1701 of the Ohio Revised Code, which governs Ohio corporations. In addition, on March 1, the General Assembly introduced HB 585, which permits decentralized autonomous organization LLCs (DAOs) in Ohio, creates special purpose depository institutions, and amends the Uniform Commercial Code to address securing digital assets.

Key Takeaways

• The New Act does not necessarily require existing LLCs to redo their operating agreements. Business owners and their legal counsel should consider whether their existing operating agreement should be updated to take advantage of the beneficial provisions of the New Act.

• The Ohio Secretary of State has uploaded new forms to use for LLC-related state filings. Before making a filing, check to make sure you are using the most up-to-date form.

• The New Act provides greater flexibility for how LLCs are structured and managed and the relationship between third parties and the LLC.

• The New Act retains the terminology of the previous act, including terms such as “Articles of Organization” and “operating agreement.”

• Third parties may rely on Statements of Authority to determine the individuals with authority to execute transactions on behalf of an LLC.

For more information, please contact a Taft business attorney.

Credit Given to: Taft Law.  Published March 29, 2022.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author, Jordan Bradstreet

-until next week.