Earlier this year, the Ohio Revised Limited Liability Company Act (the “Revised Act”) was signed into law by Governor Mike DeWine, became effective April 22, 2021, and will be become applicable to Limited Liability Companies (“LLC(s)”) on January 1, 2022. The Revised Act will be codified as Chapter 1706 of the Ohio Revised Code and completely replaces Chapter 1705—the current Ohio Limited Liability Company Act (the “Current Act”). The following is a list of the more prominent changes that LLC members should look out for or take advantage of going forward.
- Standardized Required Provisions: The Current Act provides a default rule in almost each section under Chapter 1705, “except as otherwise modified by the LLC’s operating agreement” or “except as otherwise provided in the articles of organization.” Section 1706.08 of the Revised Act removes this qualifying language and provides a comprehensive list of provisions which cannot be modified by an operating agreement (e.g., certain fiduciary duties, obligations to make capital contributions). This rule removes ambiguity as to the permissibility of certain clauses when drafting an Operating Agreement.
- More Flexible Management Structures Permitted: The Current Act adopted the bifurcated approach to LLC governance as being either member-managed or manager-managed. The Revised Act adopts a more flexible approach by allowing the operating agreement to describe the management construct of the LLC. The Revised Act allows members to structure their LLC’s governance in the manner that makes the most sense for them and their operations. For example, an LLC may now construct a governing body similar to a board of directors.
- Fiduciary Duties: Under the Current Act, the members of an LLC were bound by the fiduciary duties of loyalty, care, and good faith and fair dealing. However, under the Revised Act, LLCs may eliminate all fiduciary duties except for the duty of good faith and fair dealing. This change may present situations where a member of an LLC may be able to pursue work with another company and even compete directly with the LLC. As such, passive investors in LLCs should carefully review exculpation provisions in operating agreements after passage of the Revised Act, as it may substantially limit an investor’s recourse against an LLC’s management team based.
- Penalty Provisions and Consequences: The Revised Act provides members of an LLC greater flexibility of control by allowing them to create specific penalties and set forth certain consequences in its operating agreement for members upon the occurrence of certain events, or by simply breaching the operating agreement.
- Cancellations Related to Statutory Agents: One important new rule to look out for under the Revised Act is that, starting in 2022, the Ohio Secretary of State will provide notice to registered LLCs (foreign or domestic) when it’s determined it has failed to maintain a statutory agent or update the agent’s contact information. If an LLC that does not register a new agent or provide updated contact information for their present statutory agent to the Ohio Secretary of State within 30 days of the mailing of the notice, the articles of organization or foreign registration of the LLC will be canceled. Once cancelled, an LLC will be required to pay a filing fee, apply for reinstatement, and update its statutory agent information.
- Series Liability Protection: The Revised Act allows an LLC to establish a “series” in which the assets of each series are protected from any claim against and/or liability incurred by another series or the LLC as a whole. The series concept is similar to a corporate parent/subsidiary relationship and should prove useful in the context of certain businesses such as investment funds.
- Creditor Protections: The Revised Act also allows an LLC to protect itself against a claim by the creditor of a member, where such claim involves the member’s interest in the LLC.
- Claim Termination: The Revised Act provides an LLC the ability to terminate claims by its creditors after a period has passed following its dissolution.
Because January 1, 2022 is the applicable date for the Revised Act, LLC owners have time to determine how these changes will help, challenge, or otherwise impact their businesses. While the Revised Act may not require immediate changes to the operating agreements of many LLCs, it offers increased flexibility and opportunities going forward.
This summary is intended to highlight only some of the more prominent aspects of the Revised Act. In addition, we expect future guidance on thes e new rules from the Governor’s office, State Legislature, Secretary of State, and the Courts. However, the attorneys at Nicola, Gudbranson & Cooper, LLC are familiar with the Revised Act as it stands and its impact on businesses in Ohio. We will continue to monitor any further revisions to the Revised Act and are prepared to counsel you and your business on this important change to Ohio law as well as any additional business needs you may have.
For assistance or more information on the new Ohio Revised Limited Liability Act, please contact attorney Matthew Stanley at 216-621-7227 or [email protected].