Should You Amend Your LLC Operating Agreement to Comply with Ohio’s Revised Limited Liability Company Act?
By Bruce L. Waterhouse, Jr., Member
The Ohio Revised Limited Liability Company Act (“Revised LLC Act”) becomes effective February 11, 2022, and will replace the former Chapter 1705 of the Ohio Revised Code with a new Chapter 1706.
The Revised LLC Act is a total rewrite of the prior statute. As a result of the changes brought about by the new law, the Ohio Secretary of State will update its Ohio Business Central Filing System website with new online forms that conform to the new law.
Should LLCs formed under the old law update their operating agreements to comply with the Revised LLC Act? Although there is no express requirement in the Revised LLC Act to update an operating agreement that was adopted under the old statute, there may be benefits in doing so to the LLC, its members, or those who manage its affairs.
- Management Under the Revised LLC Act. If an LLC does not have a written operating agreement or if an operating agreement does not designate who has authority to manage the LLC, the Revised LLC Act vests management authority in a “majority of the members.” The Revised LLC Act does not define “majority of the members,” but one plausible interpretation is that a majority of the members, on a per capita basis, will have management authority, irrespective of the members’ contributions to or percentage interests in the LLC. It is likely that a member of a three-member LLC who contributed 75% of the capital to the company would have a significant concern with this interpretation. Therefore, if your LLC’s operating agreement does not clearly specify how the members vote on company decisions or in choosing management, a change should be made to clarify the members’ intentions in this respect.
On a related point, the Revised LLC Act permits a broader range of management structures than the traditional manager or officer model by expressly allowing other structures such as a board of directors or an oversight committee. The Revised LLC Act even authorizes individuals with no other relationship to the LLC to serve in a management capacity.
- Duties Among Members, Managers, and Officers. The Revised LLC Act permits an operating agreement to limit or eliminate altogether the fiduciary and other duties that the prior statute or common law would impose upon an LLC’s members, managers, and officers. The only fiduciary duty that cannot be waived by a clause in an operating agreement is the implied covenant of good faith and fair dealing that applies under all agreements. The Revised LLC Act now makes it clear, however, that the fiduciary duties of loyalty (requiring a member to act in a manner that the member reasonably believes to be in the company’s best interests) and due care (requiring a member to act with respect to the company and its business with the care that an ordinarily-prudent person in a like position would use under similar circumstances) may be waived by an express provision in an operating agreement. These waivers would be important to a member who, for example, wished to invest in another LLC that engaged in a competing line of business. Therefore, an LLC that intends to raise a substantial amount of capital from a large number of investors who will not play an active role in managing the company’s day-to-day affairs would be well advised to include a provision in its operating agreement broadly waiving duties among its members.
- Penalties for a Member’s Failure to Perform. The Revised LLC Act also permits an operating agreement to enumerate specific penalties if a member fails to perform his or her obligations. For example, a member who violates a restrictive covenant in the operating agreement against engaging in competitive activities or a requirement to make an additional capital contribution could be required to forfeit a portion of his or her membership interest or could be barred from receiving cash distributions until the violation is cured.
- Actions Requiring Unanimous Consent of the Members. The Revised LLC Act requires unanimous consent of the members to approve certain actions, such as (a) amending the operating agreement; (b) filing a bankruptcy petition on behalf of the LLC; (c) doing any act outside of the ordinary course of the LLC’s activities; or (d) terminating the LLC. It is common practice to include such requirements in an operating agreement to act as a reminder to the members.
- Housekeeping Matters. The Revised LLC Act also makes many changes that would apply in the absence of a controlling provision in an operating agreement, including relating to the distribution of assets upon termination of the LLC and eliminating requirements to maintain certain financial records and to permit members to inspect such records.
In summary, it would be advisable for any LLC with an operating agreement drafted under the prior statute to have experienced counsel review its operating agreement to ensure that it provides appropriate rights and protections to its members and management with reference to the Amended LLC Act.
Bruce Waterhouse is a Member with NGC whose practice serves the diverse needs of entrepreneurs and businesses in a variety of practice areas, including real estate, business relationships, corporate governance, ownership transitions and creditors rights. If you have questions on Ohio’s Revised Limited Liability Company Act, Bruce can be reached at: [email protected].