Effective January 1, 2022, all limited liability companies (“LLC” or “LLCs”) within the State of Ohio will be governed by Ohio’s new limited liability company act, codified in Chapter 1706 of the Ohio Revised Code (the “Revised Act”). The Revised Act is a complete rewrite of, and replaces, the current Ohio Limited Liability Company Act (the “Current Act”). Although much of the terminology between the two Acts has remained the same, there are a number of significant differences.
Ohio law imposes a number of fiduciary duties upon the members, managers and officers of LLCs. Under the Current Act, the members cannot eliminate the fiduciary duties of loyalty, care, and good faith and fair dealing (although each of the forgoing duties can be modified, to some extent). However, under the Revised Act, all fiduciary duties can be eliminated, except for the duty of good faith and fair dealing. If not doing so already, passive investors will have to pay careful attention to the exculpation provisions of the LLC’s operating agreement when evaluating an investment, as their ability to seek recourse against the LLC’s management team could be substantially limited under the Revised Act.
Under the Current Act, an LLC’s governance structure generally falls into one of two camps: (1) member managed, or (2) manager managed. The Revised Act does away with this construct. Rather, under the Revised Act, no person has the authority to bind the LLC unless (1) the person is authorized by or in accordance with the LLC’s operating agreement, (2) the person is authorized in accordance with the terms of the Revised Act, or (3) the person is authorized pursuant to a statement of authority filed with the Ohio Secretary of State. This flexibility will allow members to structure their LLC’s governance in the manner that makes the most sense for them and their operations.
The Revised Act authorizes the formation of series LLCs. This allows a company to establish multiple separate and distinct “series” under the umbrella of a single LLC. If structured correctly, the debts, obligations and liabilities of a series are enforceable against the series only, and not enforceable against any other series in the LLC or the LLC generally. For a more detailed discussion on series LLCs under the Revised Act, please read this article written by my colleague, Michael Rasor, Esq.: You will soon be able to file a Series LLC in Ohio. Should you?
Ambiguities in the Default Rules
Under both the Current Act and the Revised Act, the relationships between and among the members and the LLC are generally governed by the LLC’s operating agreement. If there is no operating agreement, or the operating agreement is silent on the matter, then the default provisions contained within the Acts control. However, there are some significant differences between the default rules of the Current Act and the Revised Act that make it more important than ever to make sure you have an operating agreement in place that accurately reflects the intent of the members.
For example, under the default rules of the Current Act, members are entitled to receive distributions in proportion to their capital contributions. However, under the Revised Act, distributions are shared by the members equally. The Revised Act does not define “equally,” but presumably this means each member is entitled to receive the same dollar amount in a distribution, irrespective of his or her respective percentage interest in the LLC.
Similarly, under the default rules of the Current Act, management of an LLC is vested in its members in proportion to their capital contributions. Thus, absent an operating agreement that states to the contrary, a member who contributes twice as much to an LLC as compared to its co-member has twice as much voting power as the co-member. However, under the Revised Act, management of the LLC is, by default, vested in a majority of the members (with certain actions requiring unanimous approval by the members). Again, it is unclear what is meant by a “majority of the members” under the Revised Act. However, it is not unreasonable to interpret this as meaning a majority of the persons designated as members of the LLC, irrespective of their percentage interest in, or capital contributions to, the LLC.
This Article is not a comprehensive analysis of the Revised Act and there are many other unanswered questions and ambiguities that will not be resolved until the Revised Act has been put into practice. Please contact your Cavitch attorney to discuss how the Revised Act affects your business and assist you with your business’ governance and organizational needs.