Ohio Senate Bill 276: Changes for the Ohio Limited Liability Company Act
In early January of this year, Governor Mike DeWine signed into law a new Ohio Limited Liability Company Act under Chapter 1706 of the Ohio Revised Code. Going into effect on January 1, 2022, the Act is intended to make it easier for people to conduct businesses in Ohio. Read on to see the different changes and how you and your business will be affected by the change.
The big changes resulting from Chapter 1706 of the Ohio Revised Code are the following:
Series LLCs
Eliminating the difference between manager-managed and member-managed
Consolidation of LLC agreement override
Codifying fiduciary duties and standards of conduct: Under the new Act, there are now statutory default fiduciary duties for members and managers.
Cancellation for failure to maintain a statutory agent: Under the new Act, each LLC must have a statutory agent. If an LLC does not continuously maintain the agent, the Act imposes statutory penalties.
Series LLCs
Before the enactment of Chapter 1706 of the Ohio Revised Code, Ohio was in the majority of the states that did not allow for the creation of series LLC. However, starting from January 1, 2022, business owners are permitted to create series LLCs under the parent LLC.
A series LLC is defined as “a unique form of limited liability company in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent series.” Each series has its own unique name, bank account, and separate books and records from the other LLCs. In short, it operates like it is its own separate entity and can carry on any for profit or nonprofit purpose.
Although a series LLC is like a separate entity, a series LLC is still organized under the parent LLC. Therefore, in Ohio, per Chapter 1706, the series LLC is established through its Operating Agreement. In addition to complying with the Operating Agreement, a series LLC must satisfy the following requirements:
One member of the parent LLC must be associated with each series;
There must be separate rights, powers, or duties with respect to specified property or obligations of the LLC;
There must be separate profits and losses associated with specified property or obligations;
The series LLC must maintain a separate purpose or investment objective
You may be wondering what the point of a series LLC is. The truth is that series LLCs offer various advantages over having a parent-subsidiary LLC including:
Reduced setup and maintenance costs;
Ease of upkeep in the state of formation; and
Asset protection. Because parties create a large number of entities under the same LLC, assets can be insulated. In a series LLC structure, liabilities in a particular series are enforceable against the assets of that series only. All of the other assets of the parent LLC or the other series LLCs will be protected.
Compared to the numerous advantages of creating series LLC’s, the disadvantages of the structure pale in comparison. For your information, some of the most noticeable disadvantages include the following:
You have to commit to this structure or amend the Operating Agreement. Series LLCs are governed by the Operating Agreement, so it is likely that if you decide to not have series LLCs initially and you later decide to expand, you will have to amend the agreement.
Separating assets. For new business owners, the idea of separating each asset and record-keeping may seem troublesome and daunting. However, this can be learned fairly quickly.
Eliminating the difference between manager-managed and member-managed
The current Act distinguishes manager-managed and member-managed LLC. Under the new Act, however, the distinction is completely eliminated. This allows the management of each LLC to be structured in a manner most appropriate for that LLC. The following can be used to authorize a person’s ability to act as an agent:
Operating Agreement
Decision of members in accordance with the Operating Agreement
Statement authority filed with the Ohio Secretary of State
Default rules under the Act
Consolidation of LLC agreement override
Under the current Act, any provision not listed under Section 1705.081 serve as default rules. These default rules can be freely modified by the LLC’s operating agreement to the extent that it chooses. The current Act provides language, such as “unless otherwise provided in the operating agreement” that results in ambiguity in interpreting the default provisions.
The new Act, however, helps with the interpretation by eliminating the extraneous language, such as “unless otherwise provided in the operating agreement.” Additionally, the Act provides that while an LLC’s operating agreement largely controls, provisions listed in Section 1706.08 cannot be changed. Thus, if a provision is not included in Section 1706.08, an LLC can modify the default provision through its operating agreement.
In summary, with the new Act, a business owner is free to change any of the provisions as long as it is not listed in Section 1706.08. This makes the modification process much simpler and leads to less ambiguity in interpreting the Operating Agreement and the Act.
Because each LLC is structured differently, business owners may be affected in different ways. However, one important thing to note is that, while Chapter 1706 brings about substantive changes, the provisions will continue to use the same Ohio terminology as before. Meaning of words such as, certificate of formation, limited liability company agreement, limited liability company interests, and registered office and registered agents will remain consistent to ensure that businesses are able to keep their operating agreement and other organizational documents current.
As always, feel free to contact Anthony Law LLC with any questions if you and your business are affected by this change.
Sources Consulted:
https://www.jdsupra.com/legalnews/ohio-s-new-limited-liability-company-3091522/
https://www.vorys.com/publications-2841.html
https://www.kmklaw.com/newsroom-publications-893
https://www.nolo.com/legal-encyclopedia/what-is-series-llc.html