An LLC should run like a reliable car—without hitches and hiccups that could interrupt business and put company assets at risk. Maintenance and fine-tuning of an LLC’s organizational form should also be as routine as car maintenance. As such, it is important to check up on all aspects of an LLC’s business organization periodically, including a look “under the hood” at the organizational documents that keep the business running. This type of review is especially important this year, as Ohio has adopted a new version of the Ohio Limited Liability Company Act (the “Revised Act”), marking changes that will take effect on Jan. 1, 2022.
What’s in the Revised Ohio Limited Liability Act?
The Revised Act is good news for Ohio businesses, as it creates more flexibility in Ohio LLC organizational structures and allows businesses to tailor those structures to suit their needs. The Revised Act, codified at Chapter 1706 of the Ohio Revised Code, completely overhauls the previous version of Ohio’s Limited Liability Company Act at Chapter 1705 (the “Current Act”), which was enacted in 1994 just before the explosion in popularity of LLCs. This change in Ohio’s LLC law is a result of a years-long process undertaken by the Ohio State Bar Association’s Corporation Law Committee to comprehensively overhaul and modernize the law based on the American Bar Association’s prototype act.
Updating Organizational Documents
Organizational documents govern the operation of an LLC and the relationship between the members. The Current Act distinguishes between member-managed and manager-managed LLCs and defines the authority of members and managers to bind the businesses under each such structure. The Revised Ohio Limited Liability Act, however, erases the distinctions between member-managed and manager-managed LLCs, allowing for easier contractual definition and modification of member roles. The law now recognizes the flexibility that has become desirable in LLC structures, leaving space for members, managers, officers, boards of directors, and so on, with each role designed to fulfill various needs within the organization.
An LLC’s operating agreement may define the roles and authority of each member or manager, with some restrictions. Under the Current Act, LLC members and managers faced ambiguity regarding whether statutory default rules were amendable by contract if the default provision of law did not contain the specific clause: “unless otherwise provided in the operating agreement/articles of organization.” The Revised Ohio Limited Liability Act eliminates this language and explicitly provides that the operating agreement of the LLC may modify the default rules under the Revised Act unless prohibited by Section 1706.08 of the Revised Act. This Section prohibits, among other things: (1) the elimination of the implied covenant of good faith and fair dealing; (2) the elimination of liability for bad faith violations of the covenant of good faith and fair dealing; (3) limitations on a court’s power regarding mandatory LLC filings; and (4) the issuance of membership certificates in bearer form. Now, LLCs benefit from the clarity that, absent these specific prohibitions, the LLC may operate in a manner consistent with its operating agreement..
For an LLC, its articles of organization are critical to ensuring the company’s continued existence and the maintenance of its limited liability status. Under the Revised Act, an LLC’s articles of organization may be canceled, and its limited liability status may be put at risk, if the LLC fails to maintain a statutory agent or keep the statutory agent’s information up to date with the Ohio Secretary of State. The current status of the statutory agent, as named in a company’s articles of organization, should be monitored to ensure that the agent’s information is up to date. Under the new law, the Secretary of State may impose statutory penalties for LLCs that fail to maintain a statutory agent or fail to update the name or address of their current agent. The Secretary of State may cancel an Ohio LLC’s articles, or a foreign LLC’s Ohio registration, for these failures after providing a 30-day notice to cure. Once canceled for failure to cure, an LLC must apply for reinstatement by submitting a form and paying a fee. To avoid these consequences, an LLC’s statutory agent information should be monitored for changes and updated regularly.
Registration of Foreign LLCs Transacting Business in Ohio
The Revised Act authorizes the Ohio Attorney General to enforce registration requirements for foreign LLCs transacting business in Ohio. Under The Revised Ohio Limited Liability Act, foreign LLCs that fail to conform to Ohio’s registration requirements may be subject to an injunction completely prohibiting their operations within the state and a fine and charges for related court costs and interest. Foreign LLCs operating within the state should take note of this new provision and ensure compliance with statutory requirements.
Full Force and Effect
A certificate of full force and effect is a certificate issued by the Ohio Secretary of State evidencing an LLC’s ability to transact business in the state or its proper and current organization under the laws of the State. Both Ohio LLCs and foreign LLCs conducting business in Ohio may need certificates of full force and effect for day-to-day operations such as opening bank accounts. The new Ohio LLC law provides that, upon payment of the requisite fee and issuance of a certificate of full force and effect, the certificate shall be definitive proof that, for a period of 30 days from issuance of the certificate, the LLC is in existence in Ohio or authorized to transact business in the state, absent any provisions in the certificate to the contrary.
New For Ohio- The Formation of Series LLCs
The Revised Act moves Ohio into the ranks of 14 other states that now provide for the formation of “series LLCs,” which are LLCs that contain multiple series of assets and liabilities under a single LLC. The Revised Ohio Limited Liability Act also defines how foreign series LLCs are to be treated under Ohio law. Series LLCs utilize specific language in the articles of organization and operating agreement to create separate series of assets and liabilities. Series LLCs may be used as one strategy to insulate assets from liability by separating certain assets and liabilities of a single LLC into distinct series, while avoiding the expense and administrative hassle of maintaining a parent LLC as well as each subsidiary LLC, with unique organizational documents at the state level. Importantly, to maintain separation between the various series, separate records of each ‘series’ finances must be carefully kept, ensuring ease of separate identification of each ’series’ assets should the business incur a liability.
Statutorily Defined Fiduciary Duties
Ohio has retained certain statutorily imposed default fiduciary duties in the enactment of the The Revised Ohio Limited Liability Act. This holdover from the Current Act sets Ohio apart from other jurisdictions that have foregone such statutory defaults, finding common law to be an adequate source to define the baseline duties of LLC members and managers. The Revised Act requires members and managers to act according to the implied covenant of good faith and fair dealing and allows for additional fiduciary duties to be defined by contract in the operating agreement.
What the The Revised Ohio Limited Liability Act Means for the Future of Ohio LLCs
The Revised Act provides an excellent opportunity for Ohio LLCs to review their organizational forms and related documents in order to refine them to suit their needs. This review should be done in a timely manner in anticipation of the law’s effective date of January 1, 2022. The Revised Act’s introduction of the series LLC to Ohio will provide a unique opportunity for both Ohio LLCs and foreign series LLCs operating within the state to ensure that their companies’ assets may be insulated from liability with minimal administrative burdens. The Revised Ohio Limited Liability Act may also come with some hazards for the unwary, and Ohio LLCs should review their statutory agent information and ensure that they are up to date to prevent state-imposed fees or injunctions threatening to interrupt their business.