Significant Changes on the Horizon for Ohio LLCs
On January 8, 2021, Governor Mike DeWine signed Senate Bill 276 into law, which restates the Ohio Limited Liability Company Act and establishes the Ohio Revised Limited Liability Company Act (ORLLCA). This new law will be fully effective on January 1, 2022. The most important updates that the ORLLCA will bring are detailed below.
Protection and Tax Advantages for Real Estate Investors with Series LLCs
The most notable change the ORLLCA makes to the existing law is the addition of the series LLC. A series LLC is a type of legal entity that allows you to create multiple series, which essentially function as mini-LLCs within a single LLC. Each series operates separately for liability purposes, so this means that creditors cannot reach the assets of one series to pay the debts of another.
Real estate investors are prime users of series LLCs. With a series LLC, investors can create a new series for each property they purchase, which is much more cost-effective than starting a new LLC for every new investment. This strategy isolates each investment property to create maximum asset protection. When the legislation goes into effect, Ohio will become one of only 16 states that allows the formation of a series LLC.
While standard LLC formation requires a registration fee paid for each LLC created, with a series LLC, a registration fee is only charged for the master LLC. No matter how many series are created within the LLC, there are no additional registration fees.
When it comes to taxes, series LLCs can save investors a substantial amount of time and money compared to separate LLCs. First, filing taxes is greatly simplified, as the series LLC only has one tax identification number (EIN), and each of the series are listed on a single tax return.
Additional LLC Management Structure Flexibility
Under the current Limited Liability Company Act, Ohio LLCs must either be classified as member-managed or manager-managed. The existing default rules establish the baseline authority of either the members or the manager to perform specific actions, such as making binding decisions for the LLC.
However, the ORLLCA eliminates the distinction between member-managed and manager-managed LLCs to provide more flexibility in entity organization. Once the new law goes into effect, LLCs can choose the management structure that best suits their unique needs.
New Statutory Penalties
The ORLLCA establishes a new statutory penalty for LLCs that do not maintain a statutory agent or submit up-to-date contact information to the Ohio Secretary of State. Under the new law, the Secretary of State must cancel an LLC that fails to keep a statutory agent after sending the LLC notice and a 30-day window to cure the breach. Fortunately, the LLC can be reinstated upon the appointment of a new agent, but not without paying additional fees.
New Option for Operating Agreement Amendment Procedures
When the ORLLCA goes into effect, members of an LLC may stipulate that it cannot be amended without receiving approval from a non-member third party. This revision is an effective business succession planning tool for owners seeking to transfer their LLC to its next generation of owners.
If you have any questions about how this affects you and your business, reach out to us.